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The Impact of Credit Score on Personal Loan Approval

The Impact of Credit Score on Personal Loan Approval

For a borrower, various parameters influence their eligibility for personal loan approval. A few of them include your age, income, and, most importantly, your credit score. This three-digit number has a significant impact on personal loan approvals. So, to help you gain an insightful understanding, this post explains how the CIBIL score affects your personal loan eligibility and approval. So, how does a credit score impact on personal loans? Let's find out.

What's a Credit Score in a Personal Loan?

A credit score is a vital parameter that represents the borrower's credibility. The three-digit number ranges between 300 and 900. The higher the score, the greater the chances of personal loan approval. Lenders use CIBIL to assess the chances of borrowers repaying loans by the due date. The factors that impact credit scores are:

  • Credit history length
  • Credit history
  • Credit account
  • The hard inquiry and more

The following table demonstrates the credit scores, their meaning, and their status.

Your Credit Score Meaning Status
300 to 599A greater chance of rejection of your personal loan applicationVery poor
601 to 700Someone with a credit score between this range is known as a 'subprime' borrower. It might be challenging to qualify for the personal loan requestPoor
701 to 749May get approval for personal loansAverage
750 to 799A credit score is good, so the person can apply for a personal loan without second thoughts.Good
800 and aboveSomeone with a credit score between this range is known as a low-risk borrower. A personal loan lender priorities offering loans to these candidatesExceptional

Does Credit Score Matter in Approving a Personal Loan?

Personal loans are an unsecured type of loan that doesn't require the submission of collateral against the loan. The interest rates are competitive and help you manage your finances more effectively. Nonetheless, while applying for personal loans, your lender assesses this parameter (along with others).

The following are the reasons for the importance of credit scores in personal loans: Let's find out how a credit score's impact on personal loans.

Assesses Your Credibility

So, how does a credit score impact on personal loans? The higher your credit score, the lower the risk of defaulting on payments. So, it gives your lender confidence in approving your loan, as a higher credit score demonstrates your responsibility. 

Influencing Your Loan Term and Amount

Your CIBIL score influences your loan amount and repayment terms. A higher score qualifies you for a larger loan amount. Besides, it also offers favorable repayment terms (like lower processing charges, longer tenures, and more).

Interest Rate and Eligibility for the Loan

Your CIBIL score also impacts your eligibility for the loan and the rate of interest. Lending institutes and lenders have certain requirements. Borrowers with high CIBIL scores can meet the criteria easily.

How Much is a Credit Score Required for Personal Loan Approval?

How much does a credit score impact on personal loans? While applying for a personal loan, your lender checks your credit report from credit bureaus. The lender reviews the credit score and other factors like income, debts, and more.

Lenders have specific credit score requirements for borrowers of personal loans. It might vary from one lender to another.

Understanding How Your Credit Score Qualifies You for Personal Loans

Your credit score impacts your personal loan approval. A decent credit score offers the following benefits:

  • Speedy Approvals

Your higher score gives your lender confidence about repayment. So you can get quick approvals from the bank or financial institute.

  • Lender Offers Easy Credit

An excellent CIBIL score helps you get loans from lenders quickly. It assures lenders that you can repay the loans by the due date.

  • Negotiate More and Get Better Deals

Once you acquire an excellent credit score, you can negotiate with the lender to reduce the interest rate.

  • Lower Interest Rates

A higher credit score enables a lower interest rate. Someone with a low credit score can get a personal loan at a high interest rate.

  • Higher Loan Amount

With a higher CIBIL score, your lender can approve an even higher loan amount.

Strategies to Improve or Rebuilt CIBIL Score

Check Errors in Credit Reports

Suppose you have paid off the amount on time and closed the account. Still, your credit report shows the debt. It might be administrative. In such cases, you need to report this issue. Credit card report issues include incorrect account details, incorrect personal details, and more. You can fix the errors by disputing them with the credit bureaus and getting them corrected.

Pay Debts on Time

Your payment history is an important aspect that affects the CIBIL score. So, you need to pay them by the due date each month. All you need is to plan and clear the balances accordingly. Regular defaults and non-payments of dues may decrease the credit score below 650. Missing out a due date is easily reflected in the credit report. Try to pay your minimum amount if you fail to pay the complete payment by the due date. 

Limit a New Credit Card Application

Credit inquiries are of two types: hard and soft inquiries. You can get credited by opting for a soft inquiry. While it doesn't have a credit score impact, hard inquiries from credit lenders can give a better insight into your credit report.

A lender may opt for a hard inquiry to understand your eligibility. Note that multiple hard inquiries within a short time may negatively impact your personal loan approval. It might result in the rejection of the personal loan application. So, credit bureaus reduce the applicant's score with multiple hard inquiries.

Additional Tips to Consider

Lower credit card balances will significantly impact your credit limits. So, it is recommended that you keep your ratio below 30%. In addition, you can try building a credit mix. The credit score may improve with various types of credit, like installment loans, mortgages, and credit cards.

Lastly, you should be patient in implementing strategies and improving your score accordingly. It might take some time, but it won't disappoint you in the long run. Practising good credit card habits will gradually improve the score.

Undertaking the above steps helps you increase your chances of getting approved for a personal loan. With these tips, you can improve your chances of qualifying for the most suitable interest rates. As a result, a higher score saves money on personal loans and other types like car loans, credit cards, etc. So, if your application has already been denied, now is the right time to plan and improve the score.

Wrapping up

Mounting debts alongside added interests might prevent you from leading a healthy lifestyle. These inevitable financial hurdles can create financial issues in one's personal life. Personal loans are a savior solution that helps pay off higher debts within one payment. After you pay the higher cost, you can continue with affordable personal loan EMIs.

You can also apply for this type of loan in the most unfavorable circumstances in life. These loans offer financial coverage, whether it's a wedding, travel plan, or higher education. However, you must ensure that you improve your CIBIL score. Lenders will assess this parameter when evaluating your eligibility. So, you understand how much a credit score impacts personal loans. Thus, the next time you apply for a loan, ensure your credit score is relevant as per the loan amount.

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