Importance of a Good Credit Score for Availing a Personal Loan

Lenders assess your personal loan eligibility based on several factors, including your credit score, income, employer profile, age, occupation and existing loan repayment obligations. However, the absence of any collateral in personal loans makes credit score often the first filter for evaluating the creditworthiness of personal loan applicants. To understand the importance of the credit score in the approval process, it's vital to first grasp what a credit score entails.

First know, what is a credit score

A credit score is a three-digit number calculated by the credit bureaus to represent the creditworthiness of individuals. A higher score indicates a lower risk of loan default, which makes lenders more inclined to approve loans to individuals having higher credit scores.

In India, there are four major credit bureaus-TransUnion CIBIL, Experian, Equifax and CRIF High Mark-regulated by the Reserve Bank of India (RBI). These bureaus gather credit information, such as loan accounts, repayment history, loan/credit card enquiries, from all credit card issuers and lenders. They compile this data to create credit reports for individuals having credit history and assign credit scores accordingly.

Banks and Non-Banking Financial Companies (NBFCs) take into consideration these credit scores to assess loan and credit card applicants, determining eligibility for their pre-approved offers and even set interest rates for their loan applicants. It's important to note that while credit reports provide detailed payment histories for various loans and credit card facilities, they do not include information about fixed deposits, savings accounts, or investments.

Why is a credit score important for availing a personal loan

Determining Eligibility for Personal Loan

Your credit score plays a crucial role in the personal loan approval process. If your credit score is below the lender's specified threshold, your loan application may be rejected. Those who meet the criteria may undergo additional eligibility checks during the personal loan application process.

Setting Personal Loan Interest Rates

Personal loan lenders are increasingly employing risk-based pricing approaches to determine the interest rates. As higher credit scores signify lower credit risk, many lenders offer lower personal loan interest rates to applicants with higher credit scores. Therefore, individuals with higher credit scores not only have higher chances of loan approval but also stand to benefit from more favorable interest rates.

Eligibility for Pre-approved Instant Personal Loans:

A higher credit score significantly increases your chances of being approved for pre-approved instant personal loan. These loans are usually offered to existing customers with strong credit profiles and are known for their quick disbursal and minimum documentation. Such offers often come with lower interest rates. Thus, prospective personal borrowers with good credit scores should first explore pre-approved offers from banks and NBFCs with which they have existing accounts or credit relationships before applying for a personal loan. Then, they should visit online financial marketplaces like Paisabazaar to check and compare personal loan offers, including the preapproved ones, from other lenders.

Minimum Credit Score Required for Personal Loans

Most lenders prefer applicants with credit scores of 700 or above for personal loans. However, the minimum score required for personal loan eligibility can differ among lenders. Some banks/NBFCs may also offer personal loans to individuals with low or no credit history but at higher interest rates to offset the higher credit risk.

Tips to improve your Credit score

Improving your credit score through responsible credit behavior is important in the long run, as it opens the door for better loan and credit card options in the future Individuals can consider the following healthy credit practices to improve their credit score:

• Pay Bills on Time: Ensure that credit card bills and EMIs are paid by their due dates
• Limit Direct Loan Inquiries: Avoid making frequent applications for loans and credit cards directly with the lenders
• Review Your CIBIL Report: Check your credit report at periodic intervals to stay informed about your credit status. Report the discrepancies, if any, in your credit report for rectification.