Before availing personal finance, the most important factor that you must consider is your creditworthiness. Does the term ring a bell? Creditworthiness is determined by your credit score which is a critical factor in your personal loan application process. Are you wondering how? Read on to find out.
What is a Credit Score?
The credit score is a numeric value calculated by the Credit Bureau or TransUnion CIBIL Limited. The three-digit number is based on your records that depict your repayment habits as a borrower. This value ranges between 300 and 900. The higher the value, the better is your CIBIL score. Hence, we can say that the credit score is a reflection of your credit profile.
Additionally, the credit score also helps lenders estimate the potential risk of lending to a borrower. It showcases to the lender that you are, in fact, responsible and financially stable to repay the loan on time. Thus, if you are about to apply for personal loan online, your credit score is a number you simply cannot ignore.
Now, let us talk about the ideal credit score for availing an unsecured loan. While the value can lie anywhere between 300 and 900, the ideal credit score is 750+. A higher credit score can make it easy to avail an unsecured credit from a bank or other financial institution.
How Does Your Credit Score Affect Your Personal Loan Application?
A credit score below 600 can result in your loan application getting rejected as it is considered inadequate for availing personal finance. However, there are some more ways that a low CIBIL score can affect your personal loan approval.
The Rate of Interest
Did you know that your credit score can determine the rate of interest offered? Lenders offer a lower rate of interest to borrowers who have a healthy credit report as it depicts credibility and stability. Therefore, even if you manage to get a personal loan sanctioned with a low credit score, the rate of interest offered by your lender will increase. Lenders do this to ensure that a bigger amount of the loan is repaid early on by the borrower.
The Loan Amount
If you require a large sum of money for a health emergency, a wedding, a house, you must keep in mind that the lender will only sanction your desired amount if you have a high credit score. This is because the amount of the loan is estimated based on multiple factors and the credit score plays a key role. Thus, a higher score will fetch you a higher amount of money.
Another benefit of having a high CIBIL score is that you can have an easier and hassle-free borrowing experience. While applying for a personal loan, the documentation process plays an important role as the financial institution needs proof of your credibility. Therefore, having a good credit history can prove your credibility to the lender which means you will require minimum documentation and will get your loan approved easily.
A first-time borrower with a high credit score can manage to get an unsecured loan easily as there is not much reason for the lender to decline. On the other hand, a borrower with a low credit score and a history of unpaid loans will find it extremely hard to be eligible for a personal loan. Lenders also have some eligibility criteria in place that always includes a decent CIBIL score. These criteria can differ for smaller and larger loans which is why you may be able to avail a small amount but be ineligible for a larger loan.
If you are about to apply for personal loan online, then you must check your credit score as it could be the biggest determinant in your loan approval process. Also, if your credit score is less than ideal then you must try to improve it before you avail any kind of loan.