If you’re wondering how important your credit score is for your personal loan application, well, it is perhaps the most important eligibility parameter. As personal loans and credit cards are unsecured credit types, the credit score is THE most fundamental parameter that lenders use to assess an individual’s ability to repay, as unlike secured loans, there is no asset or collateral involved in personal loans. If you are somebody who wants to get a personal loan, this article will let you understand what aspects impact your credit score, and what type of lender you should choose to improve your approval chances.
Why is your credit score so important for your personal loan application?
Any form of credit involves repayment and creditors need “something” to make sure they’re able to secure the amount they lend. As for secured loans (home loans and car loans), it is quite straightforward – the asset acts as security against the loan. It isn’t of course, the same case in the case of personal loans. So looking at it logically, the credit score becomes the only relevant parameter that helps banks determine a customer’s repayment capability.
The idea of having a good credit score becomes important because your credit score invariably influences the approval/rejection loan application. The equation here is quite simple – if your credit score is not good, there aren’t too many options available for you. A good credit score, on the other hand, comes with a significant set of advantages in improving your access to credit.
What are the parameters that influence your credit score?
There are at least 5 very important parameters that impact and go on to determine your credit score. Let’s take a good look at them:
Your Repayment History
Your repayment history has the highest impact on your credit score. Your repayment history will essentially comprise your pattern of past repayments, where instances of defaults and late payments negatively impact your credit score. Maintaining a good repayment history is crucial if you need a personal loan in future.
Sometimes, even if your credit score meets the eligibility criterion for popular lenders, multiple instances of late payments will affect your approval chances. As such, while you are required to meet the credit score parameter for all lenders, most lenders do not consider applications with even one instance of default over the last 12-month period.
Number of credit accounts
Another crucial parameter that impacts your credit score is the number of credit accounts in your name. If you have multiple accounts in the form of multiple loans and credit cards, your credit score tends to come down. Moreover, having multiple accounts will also prompt late payments and defaults, which by themselves affect your credit score quite severely.
When you apply for a loan, make sure you approach just ONE lender, for approaching multiple lenders will trigger multiple credit inquiries – an aspect which reflects credit-hungry behavior and invariably bring your credit score down. This also inevitably leads to rejections from lenders. So, if you want a personal loan, it is always recommended to approach just one lender. In case you get rejected for whatever reason, ONLY then should you approach another lender. It is for this simple reason that knowing your lender’s loan terms and eligibility criteria is important to avoid rejection.
Credit Utilization Ratio
The Credit Utilization, or CUR in short, is the ratio of total used credit to the total available credit. CUR is mostly calculated for credit cards, with higher CURs associating with poor credit management. A percentage of about 30% is considered a healthy CUR, with anything above 50% indicating poor credit management and suggesting a higher element of risk for lenders to lend you money.
Monthly Debt to Income ratio
The Monthly Debt to Income ratio is the ratio of your monthly debt (repayment liabilities for the given month on existing credit accounts) to your monthly income. Higher the monthly debt to income ratio, higher your credit score gets impacted – this again can be a result of late payments and defaults that are a direct result of a bad debt to income ratios. Just like the Credit Utilization Ratio, your total monthly debt should not exceed 30% of your income in order for your credit outlook to be ideal. A percentage of above 50% or 60% will not only affect your credit score but also reduce your chances of getting your personal loan application approved. In a situation like this, it is recommended to opt for a debt-consolidation loan to secure your finances. Although debt-consolidation loans attract a high-interest rate, it might possibly be the best solution to get your finances back on track.
Is it important to know your credit score before you apply for personal finance?
Yes, without a doubt it is – only after you know your credit score, you can get an idea of what type of lenders to approach if you need a personal loan. This is plainly because traditional lending institutions such as banks, usually require you to have a minimum credit score of 750. For many individuals, this can be a hard score to meet, as even a few instances of late payments can impact your credit score for the worse.
There are, however, lenders that offer personal loans to individuals with credit scores of 600+. These lenders are mostly Fintech lenders and P2P lending platforms.
Qbera is one of the leading Fintech companies in India, offering personal loans to salaried individuals in as many as 10 cities in India – this, of course, includes all the top cities in India. Qbera offers personal loans to individuals with a minimum income of Rs. 20,000 per month (net monthly). A rather standout feature about personal loans from Qbera is that the Fintech company even offers loans to individuals living in shared accommodations and employees of uncategorized or unlisted) companies in India. Qbera currently serves employees of almost 7 Lakh companies in India.
Loans from Qbera have a turnaround time of just 48 hours, while private banks have a turnaround times of at least 6-7 business days for personal loans that they offer.
So, depending on your credit requirement and considering parameters like the turnaround time, income level, and credit score, opting for a Fintech lender like Qbera makes more sense as private banks usually have stringent eligibility parameters on unsecured credit that they offer.