What is the impact of credit score on loan calculations?

Your credit score plays an important role in loan calculations. It impacts both your eligibility for a loan and the interest rate you will be offered.

In general, the higher your credit score, the more likely you are to be approved for a loan. Many financial institutions have a minimum credit score requirement that loan applicants need to meet. Applicants with lower credit scores are seen as higher risk.

Your credit score also directly influences the interest rate quoted on a loan. Interest rates are the cost of borrowing money. If you have an excellent credit score, you will typically get lower interest rates from financial institutions. With a poor score, you will be offered higher interest rates.

The difference in rates between credit scores can be substantial. Suppose you apply for a personal loan of ₹1,00,000 for a tenure of 5 years. If you have a 750+* credit score, you may get the lowest rate of 12%. So, your interest payable will be ₹33,467. On the other hand, if your credit score is 600*, you may be offered a higher interest, say 20%. In this case, your interest payable will be ₹52,361.

This shows the importance of knowing your credit score before applying for a loan.