Reena Shukla wants to avail of a personal loan for renovating her house. But she is extremely worried that her poor credit score will result in the rejection of her personal loan application. Is Reena right about this? And what can she do to fix this issue?
Continue to read to know why CIBIL score required for personal loan approval is. This blog also aims to address questions linked to how to improve my credit score, what is the requirement of a good credit score etc.
What is the impact of my credit score on my application for a personal loan?
A personal loan helps you when you need funds to mitigate your instant emergencies or other important planned expenditures. Personal loans can be used to pay for your medical expenses, finance your wedding, purchase a mobile, go on a trip, renovating your house and other personal reasons. There are zero restrictions on the end-use of personal loan proceeds.
Moreover, as a personal loan is an unsecured loan option, you do not require providing any security or collateral to avail of the loan. All the factors make personal loans a go-to loan option for millions of people. However, the catch is that – to avail of the personal loan, you require to demonstrate to the bank or financial institution that you are stable financially and are likely to make repayment of the loan by the due date. How do the lenders assess this factor? Remember, they depend on your credit history and credit score.
The initial factor that the lender assesses when evaluating your personal loan application is your credit score. A credit score is an important numerical factor that determines your credibility. It is based on the summary of your credit-linked history, debts you have availed, your past repayment record and other crucial parameters.
∙ Credit score in India ranges anywhere between 300 & 900. The higher & closer your credit score is to 900, the higher chances you hold of availing of personal loan approval.
∙ Credit scores are provided by the authorized credit rating agencies, also called credit bureaus.
∙ You quickly can review your credit score at zero cost on online financial websites. For checking your email address, mobile number, and PAN to avail your latest score.
Most banks or financial institutions require their borrowers to have a score of 750 and above should be considered for a personal loan with security or collateral.
Why does the low credit score impact your personal loan approval chances?
Lenders do not disburse the loan to the individuals who hold fewer chances of repaying them and are more likely to default. Lenders require being doubly sure that you hold the capacity to repay the loan. A low credit score puts you at high risk.
Here are some of the reasons how a low credit score can affect your personal loan application approval:
∙ If you have a high debt amount
∙ If you have any missed repayment or history of poor repayment of loan EMI and credit card bills.
∙ If you have a high CUR (credit utilization ratio)
∙ If you apply for credit very frequently
∙ If you have an imbalance credit mix
Your credit score can be low owing to any of the above-mentioned reasons. All your previous credit transactions are mentioned in your credit history. If you have a poor score, it puts you in the high-risk category, which leads to personal loan application rejection. Even if it gets approved, you might have to repay a high rate of interest, which is not a cost-effective way.
Some crucial smart tips to get a personal loan with a poor credit score
While finding the correct lender is a challenging task with a poor credit score, you still can qualify for a personal loan just following the below-listed steps:
Show proof of a stable income
You might have a low credit score if you have a steady job with a decent income or if you hold any additional income source besides your primary income, then the bank lender may likely approve your personal loan application. However, while you qualify, the bank lender may charge a higher interest rate. Thus, it is highly advisable that you ameliorate your score before placing an application for a personal loan to avail the best deal.
Ask for just the amount you require
Many lenders may reject your personal loan application instantly if you place an application for a higher loan amount with a poor credit score. It is because the bank lender thinks you are at high default risk, so they do not want to risk the high loan amount too. On the contrary, if the loan proceeds are small, the lender might be willing to provide you with a personal loan. Also, as the loan proceeds asked for are smaller, repayment will be faster, thus reducing your loan default chances.
Add in a loan guarantor.
If you hold a poor credit score, then adding in a guarantor or a co-applicant with a strong credit score can enhance your loan approval chances. It is because having a guarantor or co-applicant lowers the risk borne by the lender; thus, they may approve your personal loan application faster.
Review your credit report for any error
In case you are wondering why you have a low credit score, despite being cautious with your transactions, then there are high chances that there may be any error or fault in your credit report, that might be dragging down your credit score. Very often, the mistake on your report is due to outdated info. You might have repaid your loan, but it might still be reported as an open loan on your report. You can rectify such errors easily by approaching the concerned bodies for correction.
Request your bank lender to reconsider in case you have NH/NA on your report
In case you are new to credit, it is likely you may not have a credit score. In such cases, you are marked as NH/NA on the report. In this situation, you can speak to your lender again and explain in detail why you have no credit history. If your lender agrees upon your given reason, then it may approve your personal loan application at a relatively higher credit score.