Personal Loan: How does credit utilisation ratio influence loan eligibility? | Mint

A personal loan comes in handy when you need urgent funds as it does not require any collateral and can be utilised for multiple purposes. However, if you need a personal loan for emergency purposes, you need to know various factors that determine your eligibility to get one. One such factor that has an indirect impact on your personal loan eligibility is the credit utilisation ratio.

What is the credit utilisation ratio?

A credit utilisation ratio reflects the portion of credit you utilise from the available credit limit. It is also known as credit utilisation rate, which is the amount of credit used to the total amount of revolving credit available to you. Hence, the credit utilisation ratio is the total amount that you owe on all credit cards in accordance with the total credit limit available. It is mostly indicated as a percentage. It is one of the parameters through which credit score is calculated.

What is an ideal credit utilisation ratio?

Every lender or credit agency has its own way of determining an ideal credit utilisation ratio. However, most banks recommend having a credit utilisation ratio below 30 per cent. It is advisable to check with your respective lenders to know about their ideal credit utilisation ratio.

How does credit utilisation impact personal loan eligibility?

Credit utilisation plays an indirect yet crucial role in determining personal loan eligibility. It significantly influences your credit score, which is a key factor in evaluating your eligibility for a loan. A credit score reflects your financial reliability and ability to repay debts on time.

When your credit utilisation ratio is low, it signals that you’re managing your credit wisely and staying within your limits. This positive behaviour contributes to a higher credit score. On the other hand, a high credit utilisation ratio suggests a higher level of debt relative to your available credit, which can lower your credit score.

A strong credit score, often resulting from low credit utilisation, increases your chances of qualifying for a personal loan. Furthermore, it may help you secure loans with lower interest rates and more favourable terms, as it reduces the lender’s perceived risk.

In conclusion, the credit utilisation ratio is crucial in maintaining a good credit score. Try to maintain a low ratio even when you are not seeking a personal loan, as it will make it easier to get one in emergency situations.

(Note: Raising a personal loan has its own risks)