A borrower’s credit score is a crucial factor that finance companies consider while offering loans. A high score ensures easy approval and helps get loans at a lower interest rate. The credit score is a numerical expression of an individual’s repayment capacity based on their past payments, old and current credit accounts, credit history, etc. Lending institutions prefer sanctioning loans to applicants with high credit ratings as they have a lower chance of default.
Are you looking for an instant Personal Loan and want to get the best interest rates and loan terms? Maximising your credit score could be a great move to make.
How Do Finance Providers Determine the Interest Rates?
Lending institutions have their own sets of criteria to determine the interest rate they will offer to an applicant, including income, age, employment history, current financial obligations, loan term, etc. Besides these, the credit score is one of the key determinants as far as the interest rate on a Personal Loan is concerned. An applicant’s relationship with the loan provider may also influence the interest rates and loan terms they are offered.
How Does Credit Rating Impact the Interest Rate?
A credit score ranges from 300 to 900, and reflects an individual’s creditworthiness: their ability to repay a loan. While an ideal score would be above 630: the closer it is to 900, the greater the access to loans at lower interest rates. A high credit rating projects an individual as a responsible borrower. It reduces the lending risk for the loan provider, thus encouraging them to offer loans at better terms and conditions.
When an individual borrows money from a financial institution, they repay it in instalments according to the agreed timelines. Creditors often reject loans for applicants with low credit scores or charge them higher interest rates due to the risk associated with the borrower. Therefore, it makes sense to check the credit report regularly and work towards improving the score before seeking a loan.
Other Benefits of Having a Good Credit Score
Apart from low-interest rates on loans, here are a few more benefits of having a good credit rating:
- Better Chances of Loan Approval
Although a good score does not guarantee approval, it increases the chances of getting loan approval without hassle. If the applicant fulfils other eligibility conditions and documentation requirements, they can apply for a loan more confidently.
- More Negotiating Power
A good credit rating gives more negotiating power to the borrower: who can then get lower interest rates and favourable terms on a loan. They also have more loan options to choose from. On the other hand, if an applicant has a low score, creditors do not budge on their loan terms and offer limited loan offers with no chance of negotiation.
- Higher Borrowing Limits
One major benefit of maintaining a high score is that lending institutions let borrowers avail larger amounts since they have demonstrated consistent repayment in the past. An individual’s borrowing capacity depends on their credit history, income, and debt-to-income ratio. Low-score individuals may still get loans, but the sanction could be smaller, or the interest rates higher.
Ways to improve your Credit Score
Aspiring borrowers must check their credit reports to get an idea of where they stand. With a detailed summary of your credit history, the loan seekers identify where they are going wrong and what they can do to improve their scores. Here are a few measures to increase this 3-digit number:
- Honour All Late Payments: Payment history is the biggest factor affecting credit rating. One must pay all loan EMIs and credit card bills on time without delays.
- Fix Credit Report Errors: If the credit score has suddenly dropped due to no apparent reason, it could be due to an error in the credit report. Request a copy of the report, identify any such errors, and fix them at the earliest to get the correct score as soon as possible.
- Maintain a Balance of Credit Mix: Maintaining a good balance of secured and unsecured credit in the portfolio boosts the credit score and showcases an individual’s ability to handle different credit types.
- Avoid Multiple Loan Enquiries: Making multiple loan enquiries within a short period affects the credit rating. Each enquiry attracts scrutiny towards the credit report and reduces it by a few points. Meanwhile, when lending companies see multiple loan enquiries on the credit report, they consider such applicants as risky.
Maintaining a high credit score is essential for easy loan approvals at better interest rates and loan terms. Since the score depends on several factors and the individual’s credit-related habits, one must work towards improving it before applying for a Personal Loan instant.