Rohan recently checked his credit score and to his dismay the number was nowhere near what he had hoped it would be. This threw a wrench in his future plans as he would need a much better credit score to get other long-term loans to finish his higher education and to buy a home.
Several factors do affect your loan approval but are not vital for credit bureaus in determining your credit score. A few of these are listed below.
A personal loan is a type of unsecured loan availed to meet your current financial requirements. Unlike auto loan and home loan, which are earmarked for specific purposes, a personal loan has no such restrictions on end-usage.
The borrower enjoys the freedom to choose how they want to spend the funds from a personal loan. A personal loan is also relatively easier to get as compared to other loans. Applications for personal loans are processed based on your income stability, employment status and repayment capacity. The average loan duration ranges from 12 months to 60 months.
If you’re wondering how much loan can I get on 35000 salary, the amount generally depends on your credit score, existing obligations, and lender criteria - but typically, lenders may offer loans up to ₹5 lakhs if you meet all eligibility conditions.
Since personal loans are unsecured, the loans are approved with stricter terms and high interest rate compared to secured loans. However, despite a few disadvantages, personal loans offer multiple benefits to borrowers. They are a great option for improving your credit score, which extends a positive effect on future loan applications.
Most personal loans are unsecured and financial institutions rely less on credit score while approving a personal loan, it influences your credit score in many ways. Here are a few ways how personal loans help in strengthening your credit portfolio.
Having a personal loan adds to a better credit mix to your loan portfolio and boosts your credit score. The strategy is useful when you are planning to take a bigger loan amount or have a limited credit history.
When you manage all your credit accounts efficiently, it gets added to the credit report and is positively reflected in the score.
The credit utilisation ratio shows your current usage of revolving credit compared to the total limit of revolving credit available to you. A high credit utilisation ratio can cause a significant drop in your credit score, as it indicates increased dependence on credit.
Since a personal loan is not a part of revolving credit and is paid back in instalments at regular intervals; it does not affect your credit utilisation ratio. Utilising a personal loan to pay off revolving credit like credit card bills helps you improve your credit score.
Apart from replacing revolving debt, it also prevents piling up of other debts in the form of interest.
In the credit score calculation, credit payment history carries more weight as compared to other factors. Having a flawless credit payment history gives greater confidence to financial institutions to lend you money.
Getting a personal loan and paying it off within the stipulated time frame helps you build a favourable credit history. The longer the credit history, the better your credit report will be, as it is a testimony of responsible credit behaviour.
With a personal loan, you can clear your older debts and restart paying-off the debt with new and better terms. This will get added to your credit history as a positive payment case and will help you boost your credit score.
It is always wise to pay-off all your high-interest debt first, as it helps to lower your total interest outgo. With a personal loan, you can pay-off high-interest debt like credit card debt in a single payment, and start repaying in affordable EMIs.
The tenure of personal loan is spread over a period of 1- 5 years, and you can select the tenure that suits you.
As per his father’s advice, Rohan has already started looking for the best personal loans to meet his requirements and he hopes his father’s insight helps you improve your credit score too. As he said, a low credit score can hamper your financial standing and must be addressed immediately. While it is not possible to improve your credit score overnight, taking a personal loan is a step in the right direction. Rebuilding your credit history should be your priority and with personal loans, you can improve your credit rating more effectively.
Disclaimer: This post was first published on 15th November 2021 and has been updated for the latest information, freshness, and accuracy.
Hero Fincorp offers a wide range of financial products including Personal Loans for personal needs, Business Loans to support business growth, Used Car Loans for purchasing pre-owned vehicles, Two-Wheeler Loans for bike financing, and Loan Against Property for leveraging real estate assets. We provide tailored solutions with quick processing, minimal paperwork, and flexible repayment options for smooth and convenient borrowing experience.