Loan

Does the Foreclosure of a Loan Increase your Credit Score?

Foreclosure essentially means pre-closing your debts when you have sufficient funds with you. Repaying your loan before the deadline hits you can be assumed to be extremely helpful. So, how does a foreclosure impact your credit score, if at all it does. However, it’s not a direct impact but it does have an effect on the credit score.

A foreclosure means an ongoing loan will show closed on your credit report. This will directly reduce your outstanding debt. This is progressive for your credit score.

If you do not have an existing loan or credit card, then anyway your credit score will be lower than the usual.  If you do not have any credit card, then anyway your credit score will be hugely impacted. Your credit score will not only sink lower but may also not show any score at all.

There are certain factors which must be taken into consideration when estimating the future credit score. If you’re taking the first personal loan and foreclosing it too (lesser than a year). This will not even support a strong credit score.

To be precise, it is encouraged to try foreclosure and check your credit score after 2 months to know how it actually works.

Common Myths About Foreclosure of a Loan:

Pre-closing your personal loan considerably helps your CIBIL score

If your intention is merely to build on your credit score, then it will be an unsuccessful attempt.  This is still going to compliment your credit score if have enough investment opportunities. Avenues like mutual funds, stocks etc. can be extremely useful for building a powerful score.

It’s a common myth to conceive that a foreclosure will improve your credit score. And they take it as a guarantee for future investments and loans. According to a recent study, a forced foreclosure turns detriment to your credit score. You could be at unrest to know how can a foreclosure hurt your score but we will help you understand this better:

When you pay as per the repayment distribution table, it reflects on your potential to repay. It also throws light on how much you can afford with your current salary. Moreover, it provides insights on how the financial position can shape in the future and his ability to manage debt. However, if the individual repays the loan amount before the tenure ends, then it directly influences the individual’s building credit score.  So it is true to believe that a longer tenure will positively impact your credit score over a long period of time. When all EMIs are paid on time, it only betters your financial position from the market standpoint.

Read More: Important Points to Know Before Signing Loan for Someone Else

And ultimately when your credit score gets affected, it is extremely tedious to have it back. This will only give you a hard time at the instance of personal loan approval. Also, your future debts will be greatly affected as well.

It’s significant to know that the impact of foreclosure is not as much relevant to financial institutions.  They are more interested to know whether they will receive their interest portion on the loan or not. They suggest borrowers make repayments as per the pre-fixed schedule. Yes, they would want borrowers to pay their loan according to the schedule that’s exactly why a penalty is charged too.

To conclude, we must know that the impact of pre-closure on the credit score will change from one individual to another. Every person views it differently, depending on credit history. It is also importing to understand that credit bureaus scrutinize each aspect carefully and report the same into the credit report.

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