Banks and financial institutions view your credit score as a financial report card, using the numbers to evaluate how reliably borrowers can manage debt. So, if your score falls short, securing favourable loan terms can be an uphill battle. Hence, understanding the importance of credit scores for personal loan applications is crucial, as it directly impacts your ability to access funds on good terms when required.
Fortunately, there are compelling reasons to build and protect your credit. Read on to learn 7 key benefits of having a good credit score on personal loans.
Top 7 Benefits of Good Credit for Personal Loans
The following are the primary benefits you can enjoy when seeking a personal loan with an excellent credit score:
1. Higher Loan Approval Odds
The higher your credit score, the more likely banks and NBFCs will approve your loan application. Typically, most financial institutions approve personal loan application with a credit score of 750+. However, some of the lending institutions also provide personal loans for individuals with a credit score of below 700. This approval is based on several factors specific to the lending institution’s policy.
Building your score before submitting a loan application increases your chances of a quick approval. This highlights the importance of a credit score for personal loan applications, where a higher score boosts your approval chances significantly.
2. Lower Interest Rates
In addition to boosting approval odds, excellent credit saves money by qualifying borrowers for lower interest rates.
Loan providers view high scores as indicators of lower default risk and reward those borrowers appropriately with lower APRs (Annual Percentage Rate). Low scores signal higher risk, translating into higher rates.
*The Annual Percentage Rate (APR) is the annualised interest rate charged on a loan. It is expressed as a percentage that represents the actual yearly cost of a loan, factoring in all fees, interest, and other costs included in the calculations.
Specific interest savings vary by lending companies, but sliding from "good" credit territory into the "excellent" position may reduce APR by approximately 0.5%. Any rate reduction helps control loan costs, showing the importance of credit score for personal loan terms.
3. Larger Loan Amounts
Good credit doesn't just impact loan decisions and interest rates. It can also allow access to larger personal loans thanks to higher trust in those borrowers' ability and willingness to make timely payments.
For example, someone with fair credit may only qualify for ₹10,00,000, while a borrower with a very good history gets approved for ₹20,00,000. So, good credit expands your purchasing power when financing significant expenses with a personal loan.
4. Shorter Wait Times
Low credit scores often trigger manual application reviews and other time-consuming processes that extend decision wait times. Those delays may range from several days to over a week compared to near-instant decisions for borrowers with excellent credit histories.
In many cases, meeting the credit standards helps applicants skip tedious reviews and jump straight to quick automated approval systems. This allows faster access to funds when financing urgent expenses, further underlining the importance of credit scores for personal loan processing speeds.
5. More Flexible Repayment Terms
Good credit empowers borrowers to negotiate loan structures tailored to their budget needs. Specific leverage may include negotiating:
- Lower monthly payments through longer repayment terms
- Interest-only initial payments while getting finances settled
- Grace periods before starting repayment
- Skipping certain payments penalty-free if unexpected situations arise
6. Credit Limit Increases
Responsibly managing loan obligations builds a positive history with loan providers over time. As you demonstrate sustainable borrowing patterns, financial institutions take notice and may proactively increase your credit limit for future financing needs.
Higher limits provide flexibility to finance significant expenses using established accounts rather than applying for new credit. That saves time and reduces credit checks that could lower your score temporarily.
7. Future Opportunities
Finally, good credit scores open doors to preferential financial products. Certain financial institutions reserve specialised loans, lowered rates, and enhanced rewards for borrowers with excellent histories.
Building your score expands opportunities to capitalise on premium deals later. It also shows discipline in managing current loans, which rewards with improved future offerings.
Conclusion
A high credit score is valuable when seeking a personal loan, impacting everything from approval odds to interest rates, loan sizes, and repayment terms. While poor credit history causes obstacles, good credit pays dividends via increased lender trust and preferential treatment. By proactively building your score, you empower yourself to secure favourable loan offers, maximise purchasing power, and save money through lower interest costs. Understanding the importance of a credit score for personal loan applications can help you make smarter financial choices that boost your credit profile.
FAQs
1. What is a good credit score?
A good credit score is 700* or higher in a range of 300-900. Scores of 740+* are considered very good or excellent. Higher scores signal responsible borrowing and lower loan default risk.
2. Can I get a personal loan with a 600 credit score?
Potentially, yes, but 600 is considered fair credit, which is not great, so approval odds are lower compared to higher scores. Some banks and other financial institutions may approve loans for scores around 600, likely with higher rates or smaller loan amounts. Boosting the score improves options.
3. Does excellent credit guarantee the lowest interest rates?
Generally, yes, 800+* scores qualify borrowers for the lowest rates offered. However, other factors like income, existing debt, and loan purpose impact rates, so excellent credit only sometimes guarantees rock-bottom pricing. It does help secure very competitive rates.
4. Does my income level matter for personal loan approval and rates?
Yes, most financial institutions have minimum income requirements to qualify for a personal loan, even with excellent credit. Your debt-to-income ratio is also considered. But your credit score is the biggest factor.
5. How long does it take to improve my credit score?
Generally, it may take months to see an improvement in your credit score. Your credit rating improves based on your financial activities.
