How does your credit score impact personal loan approval and interest rate? | Mint

If you have decided to apply for a personal loan, then your credit score will play an important role in determining your eligibility for the loan as well as the interest rate which you will get. Personal loans generally charge higher interest rates as compared to other loans offered in the market by lenders. 

Before you decide on getting a loan from a particular lender, it is important that you explore different options available to you and then finally decide which deal suits you best. In this article we are going to understand how credit score can affect your loan approval and interest rates.

Understanding credit score

A credit score is a three digit number which mainly reflects your credit history and repayment track record. This score mainly ranges from 300 to maximum of 900. The credit score plays an important role in understanding your creditworthiness and also influences the interest rate which you may get against your loan EMI.

What is a healthy credit score?

A credit score of 750 and above is considered to be healthy and gives a much higher chance of getting a loan with the best offers and lowest interest rates. In other words the closer you get to the 900 mark, the better are your chances of getting the loan approved.

This is because of the fact that a lower credit score will portray that you are more likely to be a defaulter and may be incapable of repaying the loan on time.

Hence, usage and repayments on credit cards affect the score even if they had no previous loans to make. Therefore, in order to gain better interest rates and other favourable terms, it is greatly important to have a high score but other factors are taken into consideration here as well.

How does credit score affect your interest rate and loan?

Your credit score can affect your interest rate in many different ways which can ultimately affect your EMI.

High credit score: If you maintain a high credit score, this will in fact make it easier for you to attract a loan at lowest interest rates. A high credit score depicts a healthy credit history.

Low credit score: Having a low credit score immediately lowers your chances of getting the loan approved. The lower your credit score goes, lesser are your chances of getting an interest rate of your desire as this increases the lender’s risk of recovering the loan amount back due to poor credit history.

Loan repayment: Your credit score has the potential to influence your loan repayment period. A higher credit score will help you get the loan on your own terms. However, if you have a lower credit score and somehow manage to be eligible for the loan, then the terms and conditions of the loan may not align with your expectations. You may get a shorter time period with a high interest rate for your loan repayment due to low credit score.

Principal amount: Your EMI is determined based on the amount you are borrowing as loan. This amount is called the principal amount. A higher credit score can help you get a higher amount to borrow whereas a lower credit score may not be able to get you the amount you desire.

Processing time: Lower credit score can lead to heavy scrutinising of your loan application. Hence, if you have a higher credit score then you can have a comparatively smoother application process.

Conclusion 

You must understand that you may not be able to improve your credit score instantly, gradual efforts and consistency in loan repayment can help you improve your credit score. An easier way to improve your credit score is through a credit card. 

However, you must understand your financial liabilities and overall situation before you apply for any type of credit. This is because of the fact that excessive use of any type of credit may lead to debt traps. 

You must also understand that personal loans have a higher interest rate than other loans available in the market. Hence, you must understand the risks involved in these kind of borrowings and analyse every financial aspect before making a decision.