How Can a Good Credit Score Help in Your Personal Loan?
Last Updated : Oct. 31, 2020, 6:59 p.m.
What is that one thing that impresses lenders the most when they review a personal loan application? Is it the income of the applicant, his/her workplace or something else? Well, lenders do scrutinize income and workplace before approving a personal loan. But it’s the credit score that gives them the first impression about an applicant. Banks and non-banking finance companies (NBFCs) check the credit score of an individual before delving into other details. As a personal loan is unsecured, lenders offer this loan to individuals having a good credit score.
A good score is a result of paying loans or credit card dues on time for long. It reflects the high creditworthiness of an individual, and when he/she applies for a personal loan, lenders only feel obliged! So, what is a good credit score and how does it help personal loan applicants? This is what we are going to read here. Let’s start!
How Does a Good Credit Score Help Personal Loan Applicants?
Credit bureaus – CIBIL , Experian, Equifax and CRIF High Mark – assign credit scores to individuals who have a loan or credit card repayment track for at least 6 months to a year. The score ranges from 300 to 900 in India. A good credit score will be 750 and above. With that, getting a loan approval becomes a formality. We have explained this and other benefits below. Take a look.
Apply Personal Loan @ 10.75%* Rate
Lower Interest Rate Possible with a Good Credit Score
A high credit score can help you get a low personal loan interest rate deal from the lender. The low rate will keep both Equated Monthly Installment and overall interest outgo in check. But how much difference will it create in comparison to someone getting a higher rate for not so good score? Let’s find out!
For instance, you have a credit score of 780 and your friend has just about 700. Both of you apply for a personal loan of INR 6 lakh for 5 years. While you get an interest rate of 11.25%, your friend bags a 16% interest rate deal. How will it play out over 5 years?
Well, you will pay an EMI of INR 13,120, which will lead to an overall interest payment of INR 1,87,223. In contrast, the EMI and overall interest outgo for your friend will amount to INR 14,591 and INR 2,75,450, respectively. By getting the loan at 11.25%, you are paying INR 88,227 (2,75,450-1,87,223) less than your friend. Say ‘Thanks’ to your High Credit Score of 780 for ensuring the same.
Higher Loan Amount Can be a Result of Good Credit Score
Lenders feel assured offering greater loan amounts to individuals having a good credit score. Yes, your income will also play a part in deciding the loan amount for you. But having a high credit score will help you get the approval for that extra amount one often looks for. A higher loan amount will undoubtedly help you meet your needs better.
Pre-approved Personal Loans Much on the Cards
A pre-approved personal loan is given to individuals having a savings/salary account or a credit card relationship with the lender for long. The best part about this offer is ZERO Documentation and fast disbursal. But since it’s about a good credit score, mentioning a pre-approved loan based on a credit card relationship will make sense. So, if you have a good score and have maintained a solid credit card repayment track by paying your dues on time over the years, such a loan offer won’t be a surprise!
Quick Approval Will be a Formality!
A good credit score will make quick approval for personal loans a foregone conclusion. As soon as you apply, the lender will offer you the best loan quote quickly based on your credit score. All you need to do is to accept it. The loan will come into your account within a few hours to a couple of days post the approval.
Benefits for Existing Personal Loan Borrowers with a Good Credit Score
If you are paying personal loan EMIs at a higher interest rate, you can ease the burden by shifting your loan to another lender at a lower rate. This is called a personal loan balance transfer . But why we are mentioning this is because a balance transfer at a lower rate depends much on a good credit score. Here also, an example can help you understand the importance of a good score.
Example – Mahesh and Ganesh have been paying a personal loan of INR 6 lakh for the last 2 years at an interest rate of 17% per annum. Three years of repayment are left and both of them are contemplating a personal loan balance transfer. Mahesh applied for a balance transfer at another lender and got the deal at a much lower rate of 12% due to his credit score of 780. Whereas, Ganesh bagged a deal of 14% as his credit score was reasonable at 710. Let’s see how much these two could save.
| Loan Aspects | Mahesh | Ganesh |
|---|---|---|
| EMI Payable @17% | INR 14,912 | INR 14,912 |
| Interest Payable @17% for 5 Years | INR 2,94,693 | INR 2,94,693 |
| Outstanding Balance at the End of 2 Years | INR 4,18,244 | INR 4,18,244 |
| Interest Paid Over 2 Years | INR 1,76,121 | INR 1,76,121 |
| EMI Payable @12% After Balance Transfer | INR 13,892 | - |
| Interest Payable @12% After Balance Transfer | INR 81,857 | - |
| EMI Payable @14% After Balance Transfer | - | INR 14,295 |
| Interest Payable @14% After Balance Transfer | - | INR 96,361 |
| Interest Paid Over 2 Years + Interest Payable After Balance Transfer | INR 2,57,978 | INR 2,72,482 |
| Savings | INR 36,715 (2,94,693-2,57,978) | INR 22,211 (2,94,693-2,72,482) |
As you could see Mahesh is saving more than Ganesh courtesy much lower rate on a balance transfer due to his good score. However, do note that a balance transfer is beneficial only when you do at an interest rate lower than the existing one by at least 4-5%. Plus, a personal loan must have at least 2-3 years left. In the absence of these, a balance transfer will mean negligible savings as it comes with a fee too.