There is no set minimum credit score needed to secure a personal loan. Nevertheless, many lenders typically favour scores between 720 and 750. Such scores indicate responsible credit management and a higher likelihood of timely loan repayment. Even with a lower credit score, you might still qualify for a personal loan but expect a higher interest rate. Consequently, you’ll end up paying more over the life of the loan.
However, it’s crucial to understand what credit score is before delving into loan requirements. A credit score is a three-digit number that indicates your creditworthiness, or the likelihood of you repaying borrowed funds punctually. Think of it as a report card for your borrowing behaviour. A higher score signifies a stronger credit history and makes you more appealing to lenders. Here are the key points for your reference:
Credit score range
Generally, it ranges from 300 to 900, with a higher score indicating better credit health.
Credit score calculation
Your credit score is influenced by several factors, including:
- Payment history: This is the most significant factor, accounting for about 35% of your score. It shows how reliably you’ve paid off debts in the past.
- Credit utilisation ratio: This measures the amount of credit you’ve used relative to your credit limit, making up approximately 30% of your score. It’s best to maintain a low ratio.
- Credit history length: A lengthy credit history, managed prudently, typically leads to a higher score, making up about 15% of your score.
- Credit mix: A balanced combination of credit types, like credit cards and installment loans, can enhance your score, accounting for approximately 10% of your score.
- New credit inquiries: Making numerous loan applications within a brief timeframe can result in a temporary decrease in your score, comprising around 10% of your score.
Credit bureaus
The agencies you listed (CIBIL, TransUnion, CRIF, Experian, Equifax) compile information on your credit history and produce credit reports. While the fundamental factors they consider may be alike, the importance assigned to each can differ slightly, resulting in slight variations in your score among different bureaus.
A lower credit score can indeed impact your personal loan options, but it doesn’t necessarily mean you’re ineligible. Lenders might provide loans with elevated interest rates to individuals with lower credit scores. As a result, you’ll end up paying more in interest throughout the loan’s duration.
Alternatively, if you don’t meet the minimum credit score requirements, you can consider other options like NBFCs, digital lenders, peer-to-peer lending platforms, or loans against gold or mutual funds for personal financing.
Frequently Asked Questions (FAQs)
Q. Why is maintaining a minimum credit score important for a personal loan?
A good credit score is crucial, but it’s not necessarily a strict requirement to obtain a loan or credit card. A good credit score significantly enhances your likelihood of loan and credit card approval, often at favourable terms. It demonstrates to lenders that you are a responsible borrower who is likely to repay debts punctually.
Q. What is the minimum credit score versus preferred range?
There’s usually not a specific minimum credit score requirement; instead, lenders often have a preferred range. For instance, for personal loans, a preferred score might fall within the 720-750 range. Even with a lower score, you may still be eligible for a loan or credit card, albeit with a higher interest rate and possibly more stringent terms. Additionally, fewer lenders may be willing to collaborate with you.
Q. Does having a co-signer with a good credit score improve the chances of personal loan approval?
Having a co-signer with a solid credit score can be advantageous when applying for a loan, particularly if your credit score falls below the lender’s preferred range. A co-signer essentially supplements your application with their creditworthiness. As lenders consider individuals with a strong credit history to be less risky, having a co-signer can greatly enhance your likelihood of loan approval.
Q. What are the potential risks of co-signing a personal loan?
The primary risk is that if the borrower fails to repay the loan, it could negatively impact the co-signer’s credit score. Additionally, the co-signer becomes responsible for repaying the loan.
Q. How can you safeguard yourself when co-signing a loan?
Only co-sign for individuals you have complete trust in and who demonstrate a strong financial history. Before co-signing, ensure you understand all the loan terms and discuss a repayment plan with the borrower.
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Published: 02 Apr 2024, 08:13 PM IST