Personal loans are a great option for financial emergencies as they do not require collateral and have simple formalities. But did you know that you can improve your credit score with a personal loan? You must have heard that it is also necessary to have a good credit score to get a personal loan in the first place. Yes, that is correct! However, you should keep in mind that your credit score is not the only factor considered by lenders while determining your creditworthiness. Some lenders may offer personal loans to individuals despite low CIBIL scores. Again, some lenders are willing to offer unsecured Personal Loan to people with 'reasonable' credit scores if they meet other requirements.
Financial management and planning are important parts of our life. Calculating taxes, paying bills, and managing debts are not only important for our financial well-being but also affect other aspects of our lives. Despite the impeccable planning of our finances, sometimes we find ourselves in situations when we are short of money where a personal loan can help us to manage the financially tough times in our life. On top of this, if we can maintain good financial discipline while managing personal loans, then it can help in boosting our credit score, thereby helping us to get loans with more favorable terms in the future.
Benefits Of Personal Loan to Improve Credit Score
Here are some of the benefits of taking a personal loan to improve your credit score:
Pay off your old debts.
Taking a personal loan is the easiest way to repay your old debts. Plus, it also helps in improving your payment history, which in turn, improves your credit score.
When you apply for a loan, you pay it in installments determined by the lending institution based on your ability to repay it. Because you do not have to remember numerous EMI due dates, you can simply pay the installment for one loan on time which will contribute to your credit history and boost your credit score.
WHAT YOU SHOULD KEEP IN MIND WHILE TAKING A PERSONAL LOAN TO IMPROVE YOUR CREDIT SCORE
Do not make multiple personal loan applications: If you want to consolidate multiple loans using a single personal loan, choose a lending bank that suits your finances. Making multiple individual applications can backfire as each loan rejection will lower your credit score and your overall chances of getting the loan.
Choose a personal loan amount that you are comfortable with: Choose a loan amount that you can easily repay through fixed installments. To have a clear idea, use the EMI calculator to know how much you will need financially to pay the EMIs.
Calculate debt-to-income ratio: Once you have calculated the EMI, ensure that the EMI amount does not exceed 40-50% of your net monthly income. This ratio is called debt-to-income ratio.
Choose Lender wisely: Do a comparative analysis of financial lenders offering personal loans. Choose a lender with a good reputation, offer personal loans at an attractive interest rate, having a transparent fee structure, and a lender that puts customers first.
Loan or loan tenure: The duration of your loan or loan relationship with the lender is also taken into consideration. If you have made regular payments, the longer this period, the better your chances of having a good credit score.
The total amount of your loans: The total amount of your loans and loan outstanding directly affects your credit score as well. If you have a high outstanding balance to repay, your credit score will take a hit.
Current Loan: The repayment history of your current loan will also be taken into consideration.
Make regular payments: There will be no point in taking a personal loan for credit improvement if you miss or delay EMI payments. Credit cards and personal loans, both being unsecured, affect your credit score the most. So, make a habit of paying your EMIs on time.
Do not prepay your loan: If you have taken a loan for debt consolidation, you should not make the payment before the maturity of your loan. Longer credit history is considered better. So, if you keep making regular payments for a longer period, your credit score will improve.
Don't rush into other loans: As you start paying the monthly installments, your score will start improving, making you eligible for different types of loans. Offers may sound tempting but they can affect your credit score in a bad way if you miss any payments.
Do not close your loan prematurely: Your short-term and long-term creditworthiness are taken into consideration by the lender. Even if you have money to close your loan before your loan term ends, make sure to pay a large amount and don't close it prematurely.
USING PERSONAL LOAN FOR YOUR ADVANTAGE
-It is very tempting to spend the newly acquired credit through personal loans but doing so will negate the purpose of improving your credit.
-If you continue to make timely payments for six months to a year, there are chances that you can get your loan refinanced at a much lower interest rate.
-A personal loan also improves your available credit to debt ratio. It is also known as the 'Usage Ratio' which accounts for 30% of your credit score.
-A personal loan can help you build a good mix of your credit and help you get a good credit score.
-A personal loan can also help you reduce your debt faster as you can choose a shorter loan tenure.
WHEN SHOULD YOU APPLY FOR A PERSONAL LOAN?
Now that you have a brief idea about the nature of the loan, you should also know about the right time to apply for a personal loan.
You are facing a cash emergency – it could be any sort of cash emergency, whether it is any personal need, health emergency, or family crisis. Taking a loan against your credit card proves to be costly in such situations, so applying for a personal loan would be the best option.
You are paying off a high-interest loan – Personal loans are excellent for consolidating existing high-interest debts, including paying off multiple credit cards payments.
You do not want to put your assets at risk – Unlike a Loan Against Property which is available only as collateral against your home, you can get a personal loan without collateral. Although personal loans may charge higher interest rates than fixed-rate home equity or similar loans, it is a safer option for those struggling to improve their credit scores by taking on minimal risk.
Personal loans are not only meant for financial emergencies but also help in building a good credit rating. Consolidate your loans or take out a personal loan that you can easily pay off.
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