A Personal Loan is a loan in which the borrower agrees to repay the loan, usually over a fixed term, such as 1 to 5 years. It offers flexible repayment terms, allowing you to repay the loan as you can, and to manage your finances more effectively. It is a type of unsecured loan where the lender lends money to the borrower based only on the borrower's personal ability to repay the loan. Unlike loans secured by collateral, a loan without collateral is called a personal loan and can be paid back in full, and without interest, with only minimal fees.
Most lenders will require a credit score of 700 and more (depending on your age and credit history) before approving your personal loan. A credit score is an index or measure that summarizes your credit history. It is a number ranging from 300 to 900 that reflects how likely you are to pay back a loan. However, one can easily get a personal loan even at 500 credit score at most banks.
If you are looking to build your credit score, you can take a personal loan from a financial institution. This will help you to improve your credit score. You should take care of your personal loan repayments, since this is the best way to improve your credit score.
It is easy to avail personal loans from banks, credit card companies, and other financial institutions, but you should be aware of the terms of the loan you are taking out. For example, if your credit score is low, your personal loan interest rate may be high, and it might take a long time before you can repay the loan if you are not able to make the agreed payments.
If you do not pay your EMI every month, your credit score will suffer. CIBIL, Equifax, CRIF High Mark, and Experian are the four authorized credit bureaus in India that issue and maintain credit scores. If you don’t pay the EMI, your lender can report it to the credit bureaus. This will affect your credit score because it shows that your credit utilization is high (that is, the amount of debt you have left to be paid). Even if you are able to pay all the loan installments, your credit score may take a hit until your debt is paid off.
Also Read: How Can I Check My Credit History
Here are some tips on how to build your credit score of personal loan and increase your chances of getting a low interest rate on your loans.
Helps You Improve Or Maintain Payment History
Loan payments on time will improve your credit score. Pay your EMI regularly as it will improve your payment history. Keep track of your personal loan details and make your payment timely, which can help to improve your credit score.
You Can Reduce The Credit Utilization Ratio
Pay your personal loan EMIs on time and reduce the credit utilization. You can make it easy for your credit score by making your loan installments on time and your credit utilization will be low.
Add Credit Mix To Your Credit Report
Having a personal loan adds a mix of different types of credit to your credit report. This will add a significant boost to your credit score. Adding a mix of credit cards, loans, and other debts will help build your credit score. Having a mix of credit cards, loans, and other debts can give credit scores a boost. For example, a mix of credit cards and loans will show that you are able to manage your credit cards, and a mix of auto and home loans will show that you are able to manage your home loan.
More Data For Your Credit Report
Having a long credit history will positively affect your credit score. The more of your credit history that is in good standing, the more positively your credit history will reflect on your credit score.
It is easy to take a personal loan, but you need to be aware of its terms and conditions if you want to improve your credit score. If you do not have a long credit history, you will have a greater likelihood of incurring high interest rates. If you are looking to improve your credit score, keep your personal loan EMIs on time.
FAQs Build Your Credit Score With A Personal Loan
1: Why should you improve your credit score?
To get better terms on your loans and credit cards, you should work on improving your credit score. It is an important factor considered while processing your application for any type of credit.
2: Is 650 a good credit score to get a loan?
Your credit score is a rating that is based on your credit history. It ranges from 300 to 900. However, 700 is considered a good credit score for obtaining competitive loans and credit cards. A credit score of 650 is not very good and may not qualify you for advantageous loan terms.
3: What are some personal loan products for a credit score of 550?
Despite extremely poor credit scores, you can approach NBFCs for a personal loan. They will be willing to ignore your low credit score in exchange for a high interest rate.
4: What is an ideal credit score to get a personal loan?
A credit score of 700 is regarded optimum for obtaining the finest personal loan available.
5: Does checking your credit report lower your credit score?
Multiple lender checks on your credit record may have an influence on your credit score. However, checking your credit score many times will have no effect on your credit score.
6: Can I get my credit score from all 4 credit bureaus?
A person is entitled to one free credit report every year. You can request a credit report as well as your credit score from any of the four credit bureaus. You can obtain the report from more than one bureau by paying the appropriate costs.