Why Credit Score Is Important for Personal Loans

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Credit Score for Personal Loan

Credit Score for Personal Loan

A personal loan is the amount of money that a person borrows from banks, private institutions, NBFCs or credit unions for personal use. Personal loans are of two types - secured (backed by collateral security) and unsecured (does not require any collateral security).

A borrower's credit score plays an important role when applying for a personal loan. It is a three-digit number ranging between 300 and 900. Generally, a credit score above 700 is considered good, and a credit score below 600 is considered bad. Lenders evaluate the borrower's credit score before approving or rejecting the loan application form.

Borrowers with a high credit score get personal loans easily and at lower interest rates, whereas borrowers with poor credit scores face difficulty obtaining personal loans or getting loans at favourable terms.

How Much Credit Score is Required for a Personal Loan?

While Shriram Finance has its requirements, the minimum personal loan credit score depends on the lender's eligibility criteria. Below are some key points that outline the minimum required credit score for a personal loan:

A credit score above 700 is considered good and has a high chance of getting a personal loan application form approved.
Borrowers having credit scores between 600 and 700 also have chances of qualifying for personal loans but at higher interest rates.
Borrowers with a credit score below 600 may face difficulties obtaining a loan. Their loan may get approved based on collateral security for a smaller amount.

Personal Loan with Low Credit Score

A good credit score increases your chances of loan approval. A personal loan with a low credit score may still be available with lenders like Shriram Finance, but the interest rate may be higher and the options to choose from may be fewer. However, a higher credit score may be required by some lenders, particularly for larger loans.

It is essential to remember that just meeting the minimum loan eligibility criteria does not guarantee that a person will qualify for a loan. Lenders check the credit history and other eligibility criteria before approving any loan application.

Factors Affecting Credit Scores for Personal Loan

Your credit score is mainly made up of five factors. Let's discuss this in detail:

Payment History

Payment history is an important factor that affects your credit score. Your payment history reflects your loan repayment behavior. Delayed payment of loans and EMIs can decrease your score and increase your chances of being rejected for personal loans. So, make sure you make your payments on time without any delays.

Credit Utilisation

The credit utilisation ratio refers to the percentage of credit you are currently using in relation to the total credit available to you. It is the second most important factor that determines an individual's credit score and depends on the amount of credit owed on specific types of accounts, such as secured or unsecured loans, credit cards, etc. A high credit utilisation ratio can lead to the rejection of your loan application.

For example, if a person has a credit limit of ₹1,00,000 and currently uses ₹90,000, it may give the impression of being financially irresponsible. Additionally, such high credit utilisation can negatively impact your credit score.

Length of Credit History

Length of credit history refers to how long a person's credit account was open. The longer the credit history an individual has, the better the impact on their credit score and the higher the chances of loan approval.

New Credit

Applying for new credit may reduce the credit score. Every time a person applies for new credit, the lender makes a hard inquiry into their credit report. Too many hard inquiries will decrease the credit score and make it difficult to obtain personal loans.

Credit Mix

The last thing that determines a person's credit score is the types of credit they use, such as loans or credit cards. Repaying all your credit card bills and EMIs on time will indicate that you can manage different lines of credit effectively, thereby improving your credit score and chances of loan approval.

Tips to Improve Credit Score to Avail Personal Loan

To improve your credit score and increase the chances of getting a personal loan with Shriram Finance or any other lender, follow these tips:

Pay All Dues On Time

Your credit history plays a crucial role in determining your credit score. So, pay your bills and EMIs on time to improve and maintain a good credit score.

Avoid New Credit Inquiries

Avoid multiple loan applications, as hard inquiries on your credit report can reduce your credit score.

Review Your Credit Report Periodically

Review your credit report from time to time and make sure there are no discrepancies that negatively affect your credit score.

Reduce Your Credit Utilisation Ratio

A high credit utilisation ratio can hurt your credit score. To maintain a high credit score, it is essential to keep the credit utilisation ratio low by using only 30-40% of the available credit limit.

Consolidate Your Debt

If you have multiple loans, try to consolidate them to make the repayment of loans easier and improve your credit score.

Credit Score Range for Personal Loan

Here is the credit score range for personal loans:

Above 850	Excellent for loan approval
Between 701 - 850	Good (Can qualify for loan approval)
Between 501 - 700	Low (Fewer chances of loan approval)
Below 500	Poor (Difficult or cannot qualify for a loan)

Credit score ranges between 300 and 900. A credit score above 850 is considered excellent for loan approval, and a score below 500 is considered poor and has less chance of approval. For more information about credit scores, you can visit the Shriram Finance website.

Things to Keep in Mind Before Applying for a Personal Loan

There are several important factors to remember before applying for a personal loan. Here are some key considerations:

Determine The Purpose

Find out why you need a personal loan and how you will use this amount. Avail a loan only if you have a need and can repay the amount. Personal loans can be availed for many purposes, such as for home construction, organising weddings or for any personal reasons.

Research The Market

Check the lenders in the market and determine the interest rate they charge for the same amount. Select the lender only after verifying all the terms and conditions and eligibility criteria.

Check Your Credit Score

Verify if your credit score meets the eligibility criteria for obtaining a personal loan before applying.

Understand The Loan Terms & Conditions

Check the terms and conditions of the loan and understand the interest rate the lender is charging, the repayment period of the loan, the EMI amount, and fees associated with the loan.

Gather All the Necessary Documents

Prepare all the relevant documents required for obtaining a personal loan. Check whether all necessary documents are up-to-date and correct.

What Should You Do if You Don’t Have a Credit Score?

If you do not have a credit score, there are a few options that can still help you obtain a personal loan. Here are some things to consider:

Search for lenders that offer personal loans without a credit history.
Apply for a secured loan. Personal loans are usually unsecured, but you may have to offer security to avail of one if you don't have a credit score. Any valuable asset can be pledged as collateral to avail of a loan.
Prove your creditworthiness by displaying your salary slip or bank statements as proof of stable income.
Ask any family member with a good credit score to serve as a co-applicant or guarantor.
Work on building your credit history by availing credit and ensuring repayments are made on time.

Reasons to Maintain a High Credit Score

Maintaining a high credit score is beneficial in many ways. Here are a few reasons why maintaining a high credit score is essential:

Easy Loan Approval

A person with a high credit score has more chances of loan approval than a person who has a low credit score. Also, a person with a high credit score can avail of favourable terms and conditions.

Lower Interest Rates

Individuals with high credit scores can secure loans quickly and effortlessly, enjoying lower interest rates that lead to substantial savings, as they are not burdened with higher interest payments.

Access to More Options

People with high credit scores can be eligible for personal loans from multiple lenders. This enables them to compare the terms offered by different lenders and pick one that best suits their requirements and repayment capability.

Good Reputation

People with high credit scores enjoy a good reputation. It can be beneficial in refinancing existing debts and obtaining personal loans at lower interest rates.

Higher Loan Amounts

A good credit score helps in obtaining a higher loan amount. It provides you with more purchasing power and flexibility.

Conclusion

A low credit score can impact the outcome of a loan application. It is essential to maintain a credit score above 700 to obtain a higher loan amount and better interest rates. Before applying for a loan, ensure that you meet the eligibility criteria and check your credit score to determine the chances of loan approval. If you have a low credit score, consider alternative lenders that are willing to provide a loan based on other criteria such as income, collateral, or co-applicants/guarantors.

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Frequently Asked Questions (FAQs)

What is the credit score range for a personal loan?

The credit score range for a personal loan is between 600 and 900.

How much personal loan can I get with a 700 credit score?

It depends upon the eligibility criteria and the maximum loan amount offered by the lender.

Is 600 a bad credit score for a personal loan?

600 is a poor credit score to obtain a personal loan. It is essential to maintain a credit score above 700. A person may still qualify for a personal loan with a score of 600 but at a higher interest rate.

Can I get a 50k personal loan with a 650 credit score?

Yes, you may get a personal loan of 50k with a 650 credit score, but finding a lender that offers a loan at a lower interest rate may be challenging.

How do I apply for a personal loan if I have a low credit score?

Search for lenders who offer personal loans at a low credit score. Check and verify all the terms and conditions of the lender before applying for a personal loan.

How can I improve my Credit Score for a personal loan?

By paying dues on time, regularly checking the credit report, and keeping the credit utilisation ratio low.

Does EMI affect a credit score for a personal loan?

Delays in payments of EMI can hurt your creditworthiness. So, making EMI payments on time for future borrowing opportunities and lower interest rates is crucial.

Does anyone have a 950 credit score?

No. A credit score of 950 is not possible since the credit score range is between 300 and 900.

What is the lowest credit score for a personal loan?

It varies from lender to lender. You need to maintain a credit score between 650 and 750 to qualify for a personal loan at favourable terms.

Will checking my credit score repeatedly decrease it?

No. Checking your credit score repeatedly will not decrease your credit score.

What is the maximum loan amount approved under a personal loan?

Generally, banks, NBFCs and lending institutions offer a maximum loan amount of up to ₹50,00,000.

Are there any charges or fees applied to personal loans?

The lenders bear some administrative costs while sanctioning the loan amount. As a result, they may charge a small fee which varies from 1% to 4% of the loan amount.

What type of information is included in my credit report?

A credit report contains information about credit mix, credit history and credit limit.

Is an 800 credit score easy?

It might be a little challenging to maintain a credit score of 800. For this purpose, one needs to have a long credit history.

How to Check Credit Scores for Free?

Some lenders offer free credit score check services online.

What is the duration of a personal loan?

Generally, the personal loan duration ranges from 12 months to 60 months.

What is a good credit age?

There is no certain number that is considered a good credit age. The age of credit between six and 10 years is a good goal.

What increases your credit score?

By paying dues on time and never defaulting on any payments, one can increase their credit score.

Is it true that after seven years, your credit is clear?

It is a misconception that your credit is clear after seven years.

Can you restart your credit score?

It is challenging to restart your credit score, but you can improve it with time and effort.

If a loan or credit card application is rejected, will that reflect in my credit report?

Yes, it will reflect in your credit report as the information is reported by member banks or financial institutions. You can find out how often a member bank has inquired about your credit report in your report's 'Inquiries' section.

How long does it take to improve a credit score?

Improving credit score will need effort, patience and financial management. It will not suddenly boost unless there is any dispute. If you manage the finances right, increasing a super-low credit score typically takes 4–12 months.

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