Personal loans are one-of-a-kind financial assistance that can solve a lot of financial crises instantly. In recent days, people’s needs have increased significantly. To satisfy those needs, personal loans are the best option. From debt consolidation to emergency medical needs, everything is possible to solve with a personal loan.
Applying for a personal loan through a loan app is also easy, which is another reason behind its popularity. But do you know that applications for online personal loans and a good credit score have a close connection? In this article, you will learn all of these so that you understand how credit scores affect personal loan applications.
1. What is a credit score?
A credit score is a three-digit number defined by credit institutions CIBIL. Credit score denotes the index of borrowers based on any personal loan repayments or credit card usage. The score has a measurement from 300 to 900. Usually, all online lenders or even banks prefer a credit score above 700. It is called a good credit score, which means the borrower has the capability of repaying the loan amount on time.
2. What are the major functions behind defining a credit score?
There are different factors or financial functions that help to define the credit score of a borrower. Those factors are:
- Credit history
- Credit utilisation
- Credit history length
- Credit mix
- New credit
All of these factors are based on credit algorithms.
3. Personal loans and credit score
Personal loans are known as unsecured loans because there is no need for any mortgage or security fee to avail of this loan. There are different rates of interest, which vary from one mobile loan app to another. Credit score makes it easier for lenders to find out the capability of all borrowers to choose the personal loan rate of interest for the application.
A higher credit score helps to secure online personal loans easily. Here are some basic connections between an online personal loan and a credit score.
- Payment within the due date: It is very important to pay the personal fast loan EMI amount within the due date. Payment within the due date will help to maintain a good range of credit scores. In case you miss the due date, you need to pay a late fee. Besides, it will leave a mark on your credit score. So, always try to pay your loan repayment amount within the due date.
- Credit utilization ratio: Usually, it is beneficial, especially for credit cards. But indirectly, it can affect personal loan eligibility sometimes. The credit utilization ratio is the percentage of total available credit on your card. Even a personal loan can affect that ratio. Based on your usage behavior, the ratio will be affected. If you need to use that credit ratio and you can pay the loan amount within the due date, it will help you to improve your score.
- Credit inquiry: When you apply for small loans, the lender may check your credit details. The lender may look for a hard inquiry on your credit report. But that is considered only once. In case you face multiple hard inquiries, it will lower your credit score. A lower credit score means your chance of getting better loan opportunities in the future will also decrease.
- Credit score loan: This is workable for new borrowers of new-age investors who want to improve or build their credit score for the future. It is a tricky option but quite effective, too. After the loan disbursement, if the borrower repays the loan amount within the due period, the credit score will increase effectively.
Conclusion:
A personal urgent loan can improve and reduce the credit score based on the repayment terms and borrowers’ behavior. On the other hand, a lower credit score will reduce the chance of getting better loan terms in the upcoming days. So, it is the responsibility of a borrower to maintain the credit score positively.