The Importance of A Credit Score in Personal Loan Approval

With the advent of mobile banking applications and internet banking, it has become extremely convenient for customers to apply for personal loans online. IndusInd Bank, for instance, offers the Indus Easy Credit Personal Loan to customers who are eligible by requesting them to follow a simple, four-step online process. The procedure for personal loan approval differs based on the lender; however, most scheduled banks in India follow a standardised procedure to establish a borrower’s personal loan eligibility – analysing their credit score.

What is a credit score, and how does it impact personal loan approval?

A credit score reflects a borrower’s creditworthiness or their capability of repaying debt. There are several credit bureaus and CIBIL is one of the most popular in India. CIBIL score is a number that ranges between 300 and 900. This score is calculated based on the borrower’s credit risk, credit transactions, credit type, and credit period. Personal loan-lending banks, NBFCs (Non-Banking Financial Companies), and other financial institutions typically consider the range of 750 to 900 to be indicative of a good credit score. A low credit score, on the other hand, can lead to a borrower receiving a lesser amount as a personal loan or facing loan application rejection. Here are some reasons why a borrower could have a lower credit score:

  • If a borrower has missed payments: If a borrower fails to repay their credit card dues and loan EMIs (Equated Monthly Instalments) on time, they run the risk of getting a lower credit score. It is, therefore, important for a borrower to repay their credit card dues and EMIs on time.
  • If a borrower maintains a high credit utilisation ratio: The Credit Utilisation Ratio (CUR) of a borrower is the percentage of the total credit that they utilised to the total available credit limit available to them across all credit products. It is advisable for a borrower to maintain a CUR of 30% or less to maintain a good credit score.  
  • If a borrower has applied for multiple loans in a short duration: If a borrower has applied for multiple loans or credit cards within a short duration, this may impact their credit score negatively. This is because a high frequency of credit applications in a short duration indicates to lenders that the borrower is “credit hungry” and may not be financially responsible.

What is the importance of a credit score in personal loan approval? 

Here are the critical advantages of having a good credit score while applying for an online personal loan in India.

  1. A good credit score helps borrowers avail easy credit from lenders: Banks offer easy credit to borrowers who have a high credit score since it helps them trust the loan repayment capacity of the borrower.
  2. Banks approve personal loan requests instantly for borrowers with a high credit score: Banks like IndusInd Bank offer easy documentation and instant approval for their personal loans. Borrowers with a high credit score can benefit from an instant approval.  
  3. Borrowers with a high credit score have a high negotiation authority: They can negotiate the loan amount with the bank in question and get a higher amount if they have a high credit score. They may even be able to get a lower interest rate.

Wrapping up

Borrowers can also refer to a loan eligibility calculator before signing up for a personal loan to know their eligibility. This will help them know if they need to improve their credit score or other factors before applying for a personal loan. They can also use a personal loan EMI calculator, like the one on IndusInd Bank’s website, to calculate their future personal loan EMIs to budget better.