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Why Your Credit Score Matters for Personal Loans
October 7 , 2024
Managing major expenses or consolidating debt can be easily done through personal loans, but your credit score plays a crucial role in whether you'll get approved—and at what interest rate. If you understand the importance of credit scores, it can help you better navigate the personal loan process and secure better financial terms. Through this blog, we will guide you about how your credit score impacts personal loans and share some actionable tips on improving your score before applying.
What is a Credit Score?
A credit score is a three-digit number representing your creditworthiness to lenders. Typically, it has a range of 300 to 900; a higher score indicates a lower risk for lenders, while a lower score suggests a higher risk. There are agencies like CIBIL, Experian, Equifax, and CRIF Highmark who calculate these scores based on your borrowing and repayment history.
Read Also: How to Improve Your Credit Score Before Applying for a Personal LoanCredit Score Breakdown
- Excellent (750+): You’ll qualify for the best interest rates and terms.
- Good (700–749): Good chances of approval with competitive interest rates.
- Fair (650–699): Moderate approval chances with higher rates.
- Poor (<650): Limited chances of approval, often with very high interest rates
How Does Your Credit Score Affect Personal Loans?
1. Loan Approval
Generally, the first metric that lenders evaluate when you apply for a personal loan, is your credit score. If your credit score is higher you can easily get approved as it shows that you’ve been reliable with past credit commitments. While a lower score may result in rejection or a lengthy approval process.
2. Interest Rates
Your credit score has the most prominent impact on personal loans in determining the interest rate. You can secure loans with lower interest rates if you have a good score which can translate to smaller monthly payments and less total interest over the life of the loan.
For example:
Credit Score
Credit Score
Interest Rate
750+
10%–12% p.a.
700–749
12%–15% p.a.
650–699
15%–18% p.a.
Below 650
18%+ p.a.
You can save thousands over the loan tenure with lower interest rates. If you are a borrower with poor credit scores, you might face rates upwards of 18%, dramatically increasing your borrowing costs.
3. Loan Amount and Tenure
Your credit score also has an influence on the loan amount you're eligible for and the repayment tenure. If your credit scores are high, you are more likely to qualify for larger loan amounts with flexible repayment terms.
Financial Insight: Credit Score Trends in 2024
In 2024, financial institutions have become even more reliant on credit scores for approving loans. If we mention the growing importance of creditworthiness in loan approvals, we would point out the report of CIBIL which says that over 70% of personal loans in India are granted to individuals with scores above 700. The evaluation of credit scores has become more automated with the increase in digital lending platforms. This reduces the approval times but makes score improvement more critical than ever.
How to Improve Your Credit Score
We suggest improving your credit score before applying for a personal loan to save substantial money and ensure better terms. Here are some effective strategies:
Read Also: 10 Tips on How to Build Your Credit Score Using a Credit Card
1. Pay Bills on Time
Timely bill payments are one of the most crucial factors in maintaining a high credit score. One should avoid late payments on credit cards, utility bills, and loans by setting reminders or automatic payments.
2. Reduce Debt Utilization
Try to maintain your credit utilization ratio below 30% by which we mean you must not use more than 30% of your available credit limit. Higher utilization can negatively impact your score.
3. Check Credit Reports Regularly
Your score could be dragged down due to inaccuracies in your credit report. So carefully review the report for the same. One free report from each credit bureau annually is what you are eligible for. So make sure to dispute any errors you find.
4. Limit New Credit Applications
A hard inquiry is made on your report every time you apply for a loan or credit card. This temporarily lowers your score. We advise you not to apply for too many new credit lines within a short period.
Read Also: Top Banks and NBFCs Offering Personal Loans
The Role of Credit Score in Negotiating Loan Terms
A credit score is not just assessed for loan approval; it is also reviewed for negotiating terms. With a strong credit score, you can approach multiple lenders and compare offers to get the best interest rates and repayment terms. You also get the opportunity to request waivers on certain fees, such as processing fees or prepayment charges.
Here’s a quick example of how lenders might differ in terms for varying credit scores:
Lender
Interest Rate (750+)
Interest Rate (650–699)
Processing Fee
Prepayment Fee
HDFC Bank
Starting at 10.5%
Starting at 15%
1.5%-2% of loan
2% of the outstanding loan
ICICI Bank
Starting at 10.65%
Starting at 14%
Up to 2%
5% of outstanding balance
SBI (State Bank of India)
Starting at 11.05%
Starting at 15.5%
1-1.5%
No fee for loans < ₹25,000
Conclusion: Stay Credit-Savvy
Your credit score is more than just a number; it plays a crucial role in determining your loan terms, interest rates, and overall financial health. Whether you’re planning to apply for a personal loan soon or just want to improve your credit profile, understanding and maintaining a good credit score can help you secure better deals and save money.
At WeCredit, we believe in empowering individuals to make informed financial decisions. While improving your credit score may take time, the long-term benefits in terms of loan accessibility and favorable terms make it a worthwhile investment in your financial future.
Must Read
What is a Personal Loan?
Types of Personal Loans: Secured vs. Unsecured
10 Vital Tips on How to Protect Yourself from Credit Card Fraud
Personal Loans vs. Credit Card Loans
How to Foreclose a Personal Loan: A Step-by-Step Guide
Improve Your Credit Score Before Applying for a Personal Loan
Personal Loans vs. Credit Card Loans
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-Author
Manas Mahendru is a specialized content writer in the field of finance and fintech. He believes in putting across his content in a simplified manner that is properly structured and easy to get a hold of.
Our primary focus is to discover potential individual borrowers and connect them with different banks or regulated entities like Non-Banking Finance Companies (NBFC). We provide a reliable interface between the end-users and the lenders.
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