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Applying for a personal loan can be an excellent way to consolidate debt, cover unexpected expenses, or fund a significant purchase.
However, it's crucial to manage your credit file carefully during this process to avoid unnecessary enquiries that can negatively impact your credit score.
Here's how you can prevent unnecessary credit enquiries and protect your financial health when applying for a personal loan.
Understanding credit enquiries
Credit enquiries occur when a lender checks your credit report to evaluate your creditworthiness. There are two types of credit enquiries: hard and soft.
Hard enquiries
These are conducted by lenders when you apply for credit, such as a personal loan, credit card, or mortgage. Hard enquiries can impact your credit score and remain on your credit report for up to two years.
Soft enquiries
These are conducted for non-lending purposes, such as background checks or pre-approval offers. Soft enquiries do not affect your credit score.
While soft enquiries are harmless, hard enquiries can lower your credit score if they occur too frequently. This is why it's crucial to limit unnecessary hard enquiries when applying for a personal loan.
When applying for a personal loan, your credit score plays a pivotal role in determining your eligibility and loan terms. In Australia, your credit score is calculated by three major credit report agencies - Equifax, Experian, and Illion.
Each agency employs a unique algorithm to assess your creditworthiness, resulting in different credit score ranges from 0-1200 (Equifax), 0-1000 (Experian), and 0-1000 (Illion).
Tips to avoid unnecessary credit enquiries
Research lenders thoroughly
Before applying for a personal loan, take the time to research various lenders. Look for those who offer pre-qualification or pre-approval processes that involve only a soft enquiry.
This way, you can get an idea of your eligibility and potential loan terms without impacting your credit score.
Use loan comparison tools
Utilising online loan comparison tools can help you find the best personal loan options without multiple hard enquiries.
These tools aggregate loan offers from different lenders based on your financial profile, allowing you to compare interest rates, terms, and fees easily.
Get pre-qualified
Many lenders offer a pre-qualification process that only requires a soft credit enquiry.
Pre-qualification provides an estimate of the loan amount, interest rate, and terms you might qualify for, helping you narrow down your options before making a formal application.
Apply for loans within a short time frame
If you plan to apply for multiple personal loans, do so within a short time frame, typically within 14 to 45 days. Credit scoring models often treat multiple hard enquiries within this period as a single enquiry, minimising the impact on your credit score.
Consider using a loan broker
Getting a personal loan through a broker like Driva allows you to compare a wide range of lenders and get quoted the most competitive rate without leaving hard enquiries on your credit file.
Brokers access multiple loan products and provide tailored recommendations based on your financial situation, making it easier to find the best loan with minimal credit enquiries.
Conclusion
In the realm of credit management and responsible borrowing in Australia, it is imperative to grasp the impact of credit enquiries on your credit score.
By exercising prudence regarding the frequency and timing of credit applications, particularly hard enquiries, you can mitigate potential adverse effects on your creditworthiness.
Regularly monitoring your credit reports from reputable agencies like Equifax, Experian, and Illion, coupled with promptly disputing any inaccuracies, can aid in maintaining robust long-term financial health.
Additionally, using platforms such as Driva to find the best personal loan - whether it's for debt consolidation or a holiday - enables you to receive personalised loan quotes from a variety of lenders without affecting your credit score.
For more information on Driva, visit https://www.driva.com.au/
This information is of a general nature only and should not be regarded as specific to any particular situation. Readers are encouraged to seek appropriate professional advice based on their personal circumstances.