Personal loans are a prevalent form of borrowing that people utilise for various objectives like debt consolidation and home renovation. Despite the seemingly straightforward process of applying for a personal loan, many variables affect your eligibility for the loan. One of the most significant factors that lenders take into account is your credit score, which indicates your creditworthiness and capacity to repay the loan on schedule.
In this blog, we will discuss the importance of credit score in personal loan eligibility and how it impacts your loan application process.
What is a credit score?
An individual’s creditworthiness is quantified through a numerical rating called a credit score, which is determined by their credit history. It is calculated by analysing various factors such as the number of credit accounts, total debt, repayment history, and credit inquiries made (such as applications for loans or credit cards). The score is an important metric used by lenders to assess the likelihood of a borrower repaying debt on time.
A high credit score indicates that the borrower is probable to make timely debt repayments, increasing their chances of being approved for loans and credit cards. While as a low credit score can deter lenders from offering credit to the borrower. In addition to being used as a risk grading mechanism for evaluating loans, these scores can also impact interest rates, potentially saving borrowers money when availing loans from financial institutions.
How important is a credit score for personal loan eligibility?
A good credit score is important for obtaining a personal loan, as it plays a significant role in determining your eligibility and the terms and conditions of the loan. Let’s take a closer look at why having a good score is important for personal loan eligibility:
● Minimum Credit Score
Financial institutions generally regard a score of 700 or higher as satisfactory, with a score of 750 or more being considered good. The likelihood of obtaining loan approval improves with a higher score.
● Application Approval
Your financial reliability is evidenced by a high score, allowing lenders to process loan applications promptly. With a strong score, you can anticipate faster approval of your personal loan application, leading to speedy funds disbursal into your account.
● Interest Rate
Obtaining a personal loan with a lower interest rate is one of the most notable benefits of having a good credit score. A reduced interest rate can result in a lower EMI, facilitating faster loan repayment and long-term cost savings. Additionally, timely loan repayments can enhance your score, creating more opportunities for future loan options.
● Loan Amount
Individuals with a positive credit history and a good credit score have a higher chance of securing larger loan amounts, as they are perceived as less risky borrowers by lenders.
Factors affecting the credit score
Several factors impact your score, and understanding them can help you take steps to improve it. Let us examine the primary factors that impact your score in more detail:
● Repayment History
Your repayment history is one of the most significant factors that lenders consider while evaluating your creditworthiness. It reflects your consistency in making timely repayments of borrowed credit. Having a good history of making repayments can have a favourable effect on it.
● Credit Utilisation
Credit utilisation refers to the proportion of your accessible credit limit that you are presently utilising. Keeping your credit utilisation rate at or below 30% can enhance your score.
● Credit Mix
Having a mix of secured and unsecured loans can have a healthy impact on your score. A healthy credit mix, which includes a long-tenured secured loan like a home loan, and an unsecured loan like a personal loan can help improve your it.
● Credit Age
The length of your credit history, known as your credit age, is an important factor in determining your score. A lengthy credit age with a positive credit history can potentially enhance it.
How to enhance your credit score?
Improving your score may seem like a daunting task, but it is not impossible. The following are some tips that might assist you in enhancing it:
● Make timely repayments
Making prompt repayments is crucial for sustaining a positive score. It is vital to ensure that you consistently make loan repayments on time. Late payments or defaults may have an adverse impact on it.
● Check your credit score regularly
Regularly checking your credit score can help you identify any errors or discrepancies in your credit report. You can visit websites such as CreditMantri to check your credit score and other information on your credit report.
● Use autopay for EMI payments
Opt for the autopay option for EMI payments to avoid any chances of missing out on repayments.
● Split your EMI payments
Try to split your EMI or repayment amount into 2-3 parts and distribute the payment throughout the month. This can help you manage your finances better and reduce the burden of a large payment at one go.
● Avoid multiple credit card applications
Requesting numerous credit cards within a brief timeframe can have an adverse effect on your score. Hence, it is recommended to refrain from making multiple credit card applications.
● Maintain a low credit utilisation ratio
Maintaining a low credit utilisation ratio (the amount of credit you use from the available credit limit) is essential for a good score. It is ideal to maintain a credit utilisation ratio within 30%.
● Retain your old credit accounts
Holding on to your existing credit accounts can extend your credit history and potentially improve your credit score.
● Use unsecured loans judiciously
Unsecured loans should be used only when necessary. Taking unnecessary loans can increase your debt burden and negatively impact your score.
Conclusion
Having a good credit score is crucial when it comes to personal loan eligibility. Not only does it boost your chances of getting a loan approved, but it can also affect your interest rate, loan amount, and repayment tenure. By keeping your credit utilisation low, maintaining a healthy credit mix and paying your bills on time, you can boost your credit score and secure better loan options.
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