Personal Loan Credit Score

Does a Personal Loan impact on my Credit score?

An online Personal Loan is particularly popular because of its many uses and relatively easy availability. It's a useful way to cover unexpected financial needs or emergencies because it doesn't demand any collateral or security, and the approval process is much faster than other loans. Most lenders have this product in their portfolio because of its flexibility. While it is generally known that a good credit score is required to obtain a Personal Loan, the opposite is also true. If handled carefully, a Personal Loan can help you improve your credit score. Before delving into the relationship between credit score and Personal Loan, it's vital to have a basic understanding of both.

What is a Personal Loan?

An online Personal Loan is a type of loan that is used to meet personal financial needs. It is given to an individual depending on their income level, credit score, repayment capacity, employment history, and other factors. It is a fairly popular product because of the relative ease of application and timely disbursals. Some ways you can use an online Personal Loan are:

  • Family Weddings
  • Taking a vacation
  • Medical emergencies
  • Aiding higher education
  • Renovation and construction
  • Consolidating existing loans

The majority of Personal Loans have basic eligibility requirements in terms of age, employment history, monthly income, documentation, and so on.

What is Credit Score?

A credit score is a numerical value assigned to a borrower based on his or her credit history. It's a number between 300 and 900 that determines how creditworthy they are. The closer to 900 this number is, the better it is, and vice versa. In India, the credit score is calculated by the TransUnion CIBIL credit bureau based on several factors, including and not limited to an individual's credit history, past payments, active credit accounts, credit utilization ratio, and so on. The following are the levels of CIBIL score and their interpretations:

  • More than 750 - Excellent: Indicates responsible credit activity. Lenders prefer these customers and provide them with the best interest rates because they are less likely to default.
  • 650 - 749 - Good: There have been few missed or late payments in the past. A lender will almost certainly grant the loan, but at a somewhat higher interest rate and maybe even with additional documentation.
  • 550 - 649 - Average: Lenders may be hesitant to lend to such borrowers since their credit score reflects some risky financial activity. Individuals in this bracket need to increase their credit score and can advance up the credit ladder if they maintain solid financial habits.
  • Less than 550 - Poor: Individuals in this category are likely to have defaulted on payments in the past or have uncleared dues. They have a slim possibility of securing a loan since this is a high-risk category for lenders.

As can be understood from the various score ratings, several loan products including an online Personal Loan will be readily available to you only if you have a strong credit score. Thus, you need to ensure that your credit score remains above a certain threshold to keep your loan options open.

Improving your Credit Score through a Personal Loan

The way a Personal Loan is used might have a significant impact on your credit score. When used correctly, a Personal Loan can significantly improve your credit score. But the opposite is also true. A badly managed Personal Loan might cause a dramatic drop in your credit score. Here are several ways to boost your credit score with a Personal Loan:

  • Timely Repayment

Payment of debts on time is a sign of excellent credit behaviour. This demonstrates financial responsibility and, as a result, increases Personal Loan credit score. An unsecured Personal Loan with no late payments has a massive positive impact on one's credit score.

  • Debloating Credit Utilization

If you continually borrow to the maximum limit on your credit card, your credit score will suffer in the long run. An online Personal Loan could relieve some of the strain on your credit card limit, increasing your Personal Loan credit score.

  • Consolidating existing Debts

If you are juggling multiple loans and different interest rates at the same time, you can combine them into a single Personal Loan. Your monthly interest outgo is reduced if the loan has a lower interest rate than the average of your present interest rates. The lower interest burden makes it easier to repay, and it helps your credit score in the long run.

  • Longer Credit History

A lengthier credit history demonstrates that you have been credit-responsible over time. This will help to improve your credit profile and score. You will have no credit history if you have never borrowed before. Getting an online Personal Loan is a great way to start building your credit history.

Behaviours that decrease your Credit Score

  • Piling on to debt

A Personal Loan could be utilized to consolidate existing debt, as previously stated. However, if you are someone who has trouble remaining financially disciplined while repaying debts, then this will be considered risky behaviour and could damage your credit score.

  • Multiple hard inquiries on a credit report

When you apply for a Personal loan, a hard inquiry will be made on your credit report to determine your creditworthiness. While one or two inquiries won't have a major influence on your credit score, too many inquiries can. Hence, it is wise to do your homework beforehand while applying for a loan.

  • Not choosing the right lender

Taking out a Personal Loan with a high-interest rate, processing fees, and charges will simply add to your financial stress. In this scenario, missing or being late on any of your payments has a negative impact on your Personal Loan credit score. Therefore, choosing the right lender is of paramount importance. Before proceeding with a loan, investigate the lender's whole range of fees, service levels, and financial standing to determine the best fit.

In Conclusion

A Personal Loan can definitely impact your credit score. Depending on how you use it, it can help or hurt your credit score. Whatever loan you choose, the most important thing to remember is to practice fiscal discipline and pay off your debt on time.

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