Before resorting to personal finance, the most important factor that you need to consider is your creditworthiness. Does the term mean anything to you? Creditworthiness is determined by your credit score which is a critical factor in your Personal loan application process. You wonder how? Keep reading to find out.
What is a credit score?
The credit score is a numerical value calculated by the credit bureau or TransUnion CIBIL Limited. The three-digit number is based on your records that describe your repayment habits as a borrower. This value is between 300 and 900. The higher the value, the better 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. This shows the lender that you are, in fact, responsible and financially stable to pay off the loan on time. So if you are about to apply for a personal loan online, your credit score is a number you just can’t ignore.
Now let’s talk about the ideal credit score to qualify for an unsecured loan. While the value can be anywhere between 300 and 900, the ideal credit score is 750+. A higher credit score can make it easier to obtain unsecured credit from a bank or other financial institution.
How Does Your Credit Score Affect Your Personal Loan Application?
A credit score below 600 may result in your loan application being rejected as it is considered inadequate for taking advantage of personal finances. However, there are other ways that a low CIBIL score can affect your Personal loan approval.
The interest rate
Did you know that your credit score can determine the interest rate offered? Lenders offer a lower interest rate to borrowers who have good credit because it represents credibility and stability. Therefore, even if you manage to get a Personal loan sanctioned by a low credit score, the interest rate offered by your lender will increase. Lenders do this to ensure that a larger loan amount is repaid sooner by the borrower.
The loan amount
If you need a large sum of money for a health emergency, a wedding, or a house, you should keep in mind that the lender will only sanction the desired amount if your credit score is high. This is because the loan amount is estimated based on several factors and the credit rating plays a key role. So a higher score will earn you a higher amount of money.
Minimum documentation
Another benefit of having a high CIBIL score is that you can have an easier and hassle-free borrowing experience. When requesting a Personal loan, the documentation process plays an important role because the financial institution needs proof of your credibility. Therefore, having a good credit history can prove your credibility with the lender which means that you will need minimal documentation and your loan will be approved easily.
Global eligibility
A first-time borrower with a high credit score can easily get an unsecured loan easily because there is not much reason for the lender to decline. On the other hand, a borrower with a low credit rating and a history of delinquent loans will have a hard time being eligible for a Personal loan. Lenders also have eligibility criteria in place which always include a decent CIBIL score. These criteria may differ for smaller and larger loans, so you may be able to qualify for a small amount but not be eligible for a larger loan.
Final result
If you are about to apply for a personal loan online, then you need to check your credit score because it could be the main determining factor in your loan approval process. Also, if your credit score is less than ideal, you should try to improve it before you qualify for any type of loan.
