Lending institutions emphasize the applicants’ credit scores before approving their loans. That is why many people look for ways to boost their scores before applying for a personal loan. While they can use several ways to improve their score, there are numerous myths around the topic.
For instance, many believe that borrowing a loan will negatively affect their credit score. Although most NBFCs determine the loan amount and interest rate for personal loans based on credit score, it can help improve the score if handled appropriately.
Here, you will understand the relationship between credit score and personal loans and how a personal loan affects an individual’s score.
How Does a Credit Score Work?
Credit bureaus like Experian and CIBIL maintain the credit history of each individual taking a loan, credit card, or another credit line. Although the Experian credit score ranges from 300 to 900, the ideal credit score range for a personal loan starts with 630.
Many reputable lending institutions like Clix Capital have credit score-checking tools on their websites, which aspiring borrowers can use to check their scores online for free.
Credit bureaus use numerous crucial factors to calculate a credit user’s score. The critical parameters include credit history, length, diversity, and utilization. Bureaus use their unique proprietary algorithms to calculate credit scores based on these aspects.
Relationship Between Credit Scores and Personal Loans
Personal loans are unsecured loans that do not require any collateral against the sanction. These days, personal loan interest rates are extremely competitive, making them an ideal funding choice for sound financial management.
However, the loan amount and other details do not make much difference to the bureaus. The score will only improve if the borrower repays the loan EMIs on time.
How do personal loans Impact Other Credit Score Aspects?
For various reasons, taking a personal loan based on credit score is a better funding option than credit cards. While applying for a personal loan offline or online helps reduce the credit utilization ratio, an essential factor of high importance for credit bureaus. Other factors like credit mix and credit length also positively impact personal loans.
Their flexible loan terms make repayments easier for borrowers, enabling them to repay the EMIs on time. In short, taking out a collateral-free loan can help improve the aspects credit bureaus use to calculate the credit score.
Impact of a New Personal Loan Application
A new credit application is a crucial parameter for credit bureaus. Each time an individual applies for a new loan, their credit rating falls by a few points. That is why it is recommended to avoid sending multiple loan applications to several lending institutions within a short period.
However, this fall in the score is only temporary and has minimal impact on the applicant’s loan eligibility. Once the repayment period starts and the borrower starts paying the EMIs on time, the minor dip in the credit score gets compensated soon. That means the applicant gets an opportunity to improve their score by applying for a new personal loan based on credit score.
How Much Credit Score is Required for a Personal Loan?
The credit score ranges from 300 and 900. The higher the credit score, the higher the chances of loan approval with favorable terms and conditions. While each NBFC has its minimum requirements, an Experian credit score of 630 or above projects a borrower as creditworthy.
Here is a breakdown of the Experian credit score range for a personal loan:
- 550-649: Fair
- 650-749: Good
- 750-799: Very Good
- 800-900: Excellent
Based on multiple factors, the credit score will decrease or increase. As long as an individual has a steady income stream and diligently repays all EMIs and bills, they will improve and maintain a healthy credit rating.
A personal loan causes a slight dip in the credit score for a short period. However, making EMI payments on time will help build and boost your credit score. An online credit score checking tool will help check the score and determine eligibility.
While looking for financial assistance, apply for a personal loan based on your credit score, and rest assured that your credibility will improve with regular and timely repayments. So, rather than believing the myths surrounding credit scores and personal loans, consult a top lending institution like Clix Capital for more information and make the best decision.
Amaira Sharma is a finance expert and former business growth strategist who has more than 8+ years of experience in the industry, now she helps others to get better financial stability and standards. She loves to write useful tips on personal finance and businesses.