While applying for a personal loan, say for any medical emergency or to attend to sudden home repairs, you’ve probably heard someone say, “But check your credit score first!” If you’ve had some experience with loans, you may already know what this means. But if this is the first time you’re considering a personal loan, or any loan for that matter, understanding what this term “credit score” means is essential.
So what exactly is a credit score? And just how much does it matter when you’re applying for a personal loan in India? Let’s discuss how credit score impacts your loan eligibility.
What is a Credit Score?
A credit score is a three-digit number that usually ranges from 300 to 900. It tells lenders how trustworthy you are with borrowed money based on your past loan and credit card history. The higher your score, the better are your chances for a loan at low interest.
Let’s understand this with an example.
Avantika has been responsible with borrowed money in the past. She has always paid her Equated Monthly Instalments (EMIs) on time, never missed a payment and kept her debt-to-income (DTI) ratio under 40%. So her credit score is quite good.
When she applies for a personal loan to fund some home emergencies now, banks and Non-Banking Financial Institutions (NBFCs) are ready to provide her loans with low interest.
But Arnab on the other hand, was not responsible with the loans he had taken out in the past. He did not clear his credit card bill on time, and skipped a few EMIs as well. As a result, his credit score took a beating.
Financial institutions are no longer very keen to offer him loans at attractive interest rates. Now that he has to apply for a personal loan for his wedding expenses, the interest rates on the loan are way too high.
So you see, maintaining a healthy credit score is extremely important to not only secure low interest rates on a personal loan. But it may also improve the chances of approval. Of course, there are several other factors determining your eligibility for a personal loan. But the role of your credit score in this cannot be overlooked.
Who Gives You a Credit Score?
In India, credit bureaus like CIBIL, Experian, CRIF High Mark, and Equifax are responsible for calculating your credit score.
They check your financial history before giving you the score. And here are a few among the many factors they check:
- How many loans or credit cards you’ve taken
- Whether you’ve paid EMIs on time
- How much money you owe
How Your Credit Score Affects Your Personal Loan Application
Ready to understand how your credit score affects your personal loan application?
Loan Approval
- High Score (750 and above): Loan providers see you as a low-risk applicant. You’re more likely to get your personal loan application approved easily!
- Average Score (650 to 749): You might still get approved. But the process could take longer and stricter loan terms such as higher interest rates.
- Low Score (below 650): You may have less chances of approval. To get the loan, you might have to bring in a guarantor or pledge security.
Interest Rate Offered
- If your score is higher, you may be able to negotiate for a personal loan for competitive interest rates. What this essentially means is that you end up paying less money in interest over the tenure of the loan.
- With a lower credit score, you may still be eligible for a loan, but at a higher interest rate.
Loan Amount and Loan Tenure
- Lenders show more confidence in you. They may be ready to offer a higher loan amount if you have a high credit score. A poor credit score can limit the amount you’re eligible for.
- When it comes to tenure, with a high credit score, lenders may even be ready to negotiate a longer repayment term. A low score comes with stricter loan terms.
Processing Time
- A strong credit score usually helps with faster loan processing time.
- With a low score, lenders may take more time to review your application. They may also ask for additional documents.
Here’s a quick table to compare things.
Why Your Credit Score May Be Low
Ever wondered why your credit score is low? Several simple factors can make or break your credit score for personal loan approval. Let’s take a look at some of them here.
- Paying EMIs or credit card bills late
- Using too much of your credit limit
- Applying for too many loans at once
- Defaulting on any loan
Tips to Improve Your Credit Score
Don’t feel too bad if you’re not getting approved for a personal loan just because your credit score isn’t great. Honestly, there are a few credit score tips you can try to get that score back up.
- Always try to pay your credit card bills and EMIs on time. This is very important.
- Try not to use up all your credit. Like, if you can, keep it around 30-40% of your limit.
- It’s probably not the best idea to take out or apply for a bunch of loans at once. Lenders might get the idea that you’re too eager for credit.
- And yes, check your credit report for loan approval. Do it every now and then. If you spot any mistakes, fix them right away.
Quick Recap
Working to keep your credit score healthy can lead to faster approvals, lower interest rates, and higher loan amounts. Although there are multiple factors involved that determine how eligible you’re for a personal loan, the role of a credit score is of prime importance. It’s a simple number with a big impact on your financial journey.
If you’re planning to take a personal loan anytime soon, start working on improving your credit score for loans today. A little effort now can save you a lot of stress, and not to forget, money, later.
Shriram Finance provides Personal Loan at competitive interest rates with flexible tenures. Visit our website today to get started on your journey.
FAQs
What credit score is really considered “good” for personal loans in India?
In most cases, 750 and above is called ‘good’. Banks and NBFCs prefer it, and you may get quicker approval with lower interest.
Will a low credit score mean I never get a loan?
Not at all. Some lenders, like certain NBFCs, are more flexible. But they may request for a guarantor.
Does every loan application reduce my score?
Yes, each application is a “hard enquiry” and too many together can pull your score down. Space them out if possible.
What’s the fastest way to improve my credit score before my loan?
Pay all your bills and loan dues on or before time for the next few months. Check your report for mistakes and avoid new debts till your score climbs back up.
I have never taken a loan or credit card. Will my blank credit history hurt my chances?
Yes, usually. If you don’t really have any history, banks and NBFCs can’t really tell how good you are at paying back. So yes, they might end up giving you a smaller loan or even ask for some extra stuff as security. It’s a good idea to start off with a basic credit card and use it wisely. That’ll help you build up your score.