When you first set out into the world of credit, you may find it hard to secure any money. That's because there's no history yet to show you making repayments. Credit providers and lenders will want to bet on a sure thing, or as near to sure as possible — however, to get to this stage, you need to set up a positive history of repayments.
What does it all mean?
To get approval for loans or credit cards, you'll need a good repayment history. This depends on what you're planning, as lenders will deal with those without much of a history. The more involved (or expensive) the item you want, the more critical it is to have a positive line of repayments.
Other factors apply as well — even those with high credit scores will be spending years, even decades, locked into a repayment plan of some sort. Anyone willing to lend you money for such a long time will want some proof that you can commit and won't default on any repayments.
What does positive payment data measure?
Each time you make a payment, the data input is scored based on whether the payment is made in time and the total amount agreed upon with the credit provider. The entire life cycle of your repayment history should start with an agreement for a certain amount of credit, plus additional interest, and end with closing an account fully paid.
How to come to a decision.
First, you may have a goal or two in mind, which requires a specific loan or credit amount — like a new car or a card to do online shopping. For every goal you have, they'll be credit providers who'll deal with you. Some will focus solely on short-term or instant loans, and others take a more comprehensive approach. It's up to you to research these options and choose one that fits within your ability to repay.
Say you see a new car for around $30,000. You can't afford the car in one go, so you search for a lender who's able to forward you a loan. You agree on a ten-year loan period without any deposit, repaying monthly at $250.
You'll then be set a certain amount of interest to repay, usually per year, unless it's a very short-term loan. This interest is then added to the total amount of the loan. So, if the interest is 7% of the total amount owed, you'll be paying an additional $2,100 in total, bringing the whole amount up to $32,100.
Per month the total amount to pay will be $270.50.
What if I extend the loan out further?
The main thing lenders use when setting loans, aside from your credit repayment history, is the length of time the loan is fixed. The longer you're paying off a loan, the more interest you incur, which is suitable for lenders and you in the short run but potentially more expensive overall.
Should I opt for as short a loan period as possible?
That depends on what you can afford. Having a lower weekly/monthly repayment can be helpful, as it means you have more money to live on right now because you're spreading the loan over a longer time. Also, the longer your loan is spread out for, the lower your monthly costs — even if your overall cost is higher.
What is the best thing for me to do?
The best thing to do is to find a happy medium. Work out what you can comfortably afford to pay back each month and stick to that if you can.
I'm ready to begin a loan.
Are you sure you've found the right loan? Different lenders will have different rates of interest, terms for non-repayment, and even differences in their establishing fees (a small fee that's added on when you open a loan or credit account).
It pays to choose a loan you can afford to repay in total. Meeting more than the minimum set amount also helps your repayment history, but so does keeping a good line of credit open for a while.
Lenders may also add penalties if you pay too early — so be sure to check first. It sounds unusual, but lenders make their money off interest collected on your loan. This interest is based on the length of time a credit loan is open — so if you pay the loan off too early, they won't get as much. Be sure to check with your provider, though, as some lenders have no early repayment fees and are just happy they could help you out.
So when it comes to loans, it may be best to stick to the timeframe of the original repayment to avoid any 'early' penalties.
How do I find the right loan?
As soon as you begin researching loans and asking questions online, you'll get targeted ads based on your search. So one way is to use the search algorithm on Google. Another way is to contact lenders, credit unions, or banks directly to set up an appointment to discuss options.
Yonda will soon be able to help you out, too — our app uses your goals, as well as other voluntary credit information, to help find loans suited to what you both want and can afford. We're currently still developing this feature, but when it's ready, Yonda will be able to help find you specific loan types suited to your interests.
Positive repayment data is just about finding a loan that you can afford to keep paying building up your credit history to secure better credit in the future. All of which saves you money and opens more doors for you in the future.