Credit Score’s Impact on Personal Loan Rates

Credit score refers to a humble three-digit figure that has a huge impact on personal loan interest rates. A high credit score allows you to claim the lowest rate from your borrower. 

Conversely, if your credit score is low, you may have to pay higher interest rates on your personal loan. Therefore, maintaining a good credit score is indispensable for any person desiring to obtain a loan in the future.

The following sections highlight the role and importance of credit scores in determining personal loan interest rates. You will also learn ways to improve your credit score to get low-interest personal loans for students. 

Credit Score – A Primer

Credit score refers to a figure usually ranging between 300 and 900. This three-digit figure can make or mar your prospects of securing a personal loan. Moreover, lenders often look at this figure to determine the interest rate on personal loans.

Credit rating agencies, such as TransUnion CIBIL, maintain and preserve credit scores. Every time you apply for a loan or credit card, your credit score, a.k.a. CIBIL score, gets affected. It may also be affected when you repay your loan EMI or settle your credit card bills.

As a rule of thumb, you may expect the best personal loan interest rates when your credit score is above 750. 

However, credit score is not the sole determinant of personal loan interest rates. Lenders view the credit score in conjunction with multiple other factors, such as the borrower’s age, income profile, relationship with the lender, etc. 

Credit Score and Personal Loan Interest Rates – The Relationship

Credit bureaus rely on a complex formula to calculate credit scores. Broadly, the following five factors affect your credit score:

• The history of your loan or credit card payments
• The amount you owe to your lender or card issuer
• The total length of your credit history and profile
• Any new credit
• The credit mix of secured and unsecured loans 

So, the number you get on your credit profile speaks volumes about how you deal with finances and credit. If you never default on your loan or credit card dues, your score will be high, and vice versa. 

Similarly, your score will be high if you prefer to settle one loan before applying for another. And when your credit score is high, you can enjoy the perks associated with it. 

Credit Score For Personal Loan – Decoding the Numbers 

The credit score enables lenders to classify borrowers according to their risk profiles. It typically acts as a tool with which lenders classify the risk profile of borrowers. The following is a detailed laydown of what scores or score ranges mean for lenders in India:

• Below 550 – A score below 550 is considered below average. If your credit score is below 550, lenders will consider you a risky borrower and increase the interest rate to minimise their risk.
  
• Between 550 and 700 – This score is considered a fair score. Although a score between 500 and 700 offers better chances of loan approval, you may have to shell out a little extra on interest.

• Between 700 and 750 – If your credit score is between 700 and 750, your chances of getting affordable personal loan interest rates will be quite high.

• Between 750 and 800 – Considered a very good score, a 750+ credit score makes your profile quite attractive to lenders. 

• Above 800 – Any score above 800 is considered the best. So, you may expect the lowest personal loan interest rate if your credit score is above 800.  

It is important to note that a credit score is only one of several parameters lenders use to evaluate a borrower’s creditworthiness. 

High Credit Score for Personal Loan – The Benefits

Besides making personal loan interest rates more affordable, a high credit score offers the following other benefits:

Quick Approvals 

Since a high credit score indicates a good financial profile, lenders expedite the loan approval process to retain the goodwill of a borrower. Generally, lenders take around 72 hours to approve a personal loan application. A high credit score may enable you to get it earlier. 

Competitive Loan Terms 

A low-interest rate is the most direct benefit of a high credit score. Additionally, your lender may also decrease the personal loan processing fee to attract you to them. 

Extended Loan Tenure 

A high credit score is often associated with enhanced repayment tenure. And an enhanced loan tenure may also mean a low EMI. So, you can save a considerable sum if your credit score is high. 

Pre-approved Loans 

Some lenders offer pre approved personal loan to borrowers with a high credit score and an existing relationship. 

Conclusion

Now that you know the importance of increasing your credit score. Make sure you repay loans timely. Set reminders for loan repayments and retain or use your old credit cards to increase the length of your credit profile. 

Keep your credit utilisation ratio low. Scan your credit report for discrepancies and bring them to the attention of the credit bureau.

Getting a low-interest personal loan can be pretty easy when you monitor your credit score and keep it above 800. However, if your credit score is lower than that, follow the steps mentioned above to increase it and save more.