How loans work

A loan is property, material goods, or sum of money borrowed with the expectancy to be paid back with interest. There are different types of loans that we will get into later. First let’s discuss how loans can help your credit. 


Buying things cash may seem like a good idea or something you’ve been taught but it doesn’t help you establish credit history. With credit history being 35% of your fico score, it is important to establish credit as soon as possible. Loans can help you build credit if you successfully make payments on time and remember making payments on time is how you establish a good credit history. Contrarily, loans can hurt your credit if you default or pay late. Taking out a loan can also reduce your ability to borrow. Lenders will look at your debt to income ratio to determine if you can afford to borrow more. 


We briefly mentioned there are different types of loans such as personal loans, mortgage loans, auto loans, student loans, etc. Having different loans reporting on your credit is actually a good thing because it allows you to have a credit mix, which makes up 10% of your fico score. If you are shopping among lenders to get the best deal it is wise to do it in a short time frame. Too many inquiries in a short period of time will result in a slight decrease of your score. Some credit unions will use the same credit pull for up to 30 days on multiple products. 


When it comes to student loan debt almost everyone has them. There are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. The average student in the Class of 2017 has about $40,000 in student loan debt, compared with $37,172 in student loan debt for the Class of 2016 according to Make Lemonade. (http://www.makelemonade.co/student-loan-debt-statistics/) These numbers show that most graduates can’t afford their monthly student loan payment which has increased the number of new 30 day delinquent balances to $32.6 billion (Source: As of 1Q 2018, Federal Reserve & New York Federal Reserve)

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