How Can A Personal Loan Affect Your Credit Score?

By Author: Anjitha
Total Articles: 4
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Whether you have been hit with a medical emergency, funding education, want to travel around the world, a personal loan can be a solution to these problems. A personal loan is a great way to pay your major expenses when you don't have cash on hand or in unexpected situations. Lenders give importance to the borrower's credit history before approving the loan application. Your credit history is an indicator of your repayment capacity and how well you control your own finance. The credit score plays a major defining role once you make the personal loan application, whether it is secured or unsecured.

Many people think that taking a personal loan would impact their credit score negatively, which is untrue. The impact of a personal loan on your credit score can either be positive or negative. To understand how a personal loan would affect a credit score, it is important to know how a credit score is calculated.

WORKING OF CREDIT SCORE

A credit score is a number that ranges between 300-900 and generally scores above 750 are preferred by the banks. Lenders use the credit scores calculated by CIBIL TransUnion, ...
... Experian, Equifax, or CRIF High Mark in order to grant loans in India. Several banks consider the CIBIL score as a benchmark when granting a loan to the borrower. There are some critical factors credit bureaus consider to calculate someone's credit score. That include, your credit history, credit utilization, credit history length
credit mix, new credit, etc.

A personal loan is an unsecured credit facility provided by financial institutions, which means they don't require you to pledge any collateral. As far as the credit rating is concerned, a personal loan is considered to be a better option than using a credit card. This is because taking a personal loan can reduce your credit card utilization ratio, which is an important factor for credit bureaus. Making your loan payments on time helps to establish a positive payment history. In short, depending on how you use the loan amount, a personal loan improves your credit score.

Considering the negative impact, when you apply for a personal loan lenders will do a credit check on you. The hard inquiry may negatively impact your credit score. However, with timely and prompt repayment Personal loans do affect credit your score in a positive manner. Always keep in mind the personal loan interest rate and personal loan eligibility before applying for a loan.