How does a credit score affect your personal loan interest rate

When it comes to securing a personal loan, your credit score plays a vital role in determining the interest rate you will be offered by lenders. A credit score is a numerical representation of your creditworthiness, reflecting your repayment history, payment patterns, and financial behaviour. Lenders rely heavily on credit scores to understand and assess whether a borrower is a high-risk borrower. So, let’s understand how and why your credit score has such a bearing on your personal loan interest rates. 

The link between credit score and personal loan interest rates

Your credit score reflects your financial discipline and reliability as a borrower. Lenders consider it a significant factor in determining your personal loan interest rate. A higher credit score signifies a lower risk for lenders, resulting in more favourable interest rates. On the other hand, a lower credit score suggests a higher level of risk, leading to higher interest rates or even loan rejection.

There are several credit rating agencies in India but one of the most used credit scores is the CIBIL score, which is a three-digit score ranging from 300 to 900. Usually, a score of 750 and above is considered a good score, which can help you secure an attractive personal loan interest rate.A higher credit score suggests a history of responsible financial behaviour, including consistent repayment of loans and credit card bills. Lenders view such borrowers as less likely to default on their loan payments, making them more attractive candidates for loans.

Alternatively, a poor credit score, characterised by missed payments, defaults, or bankruptcies, can not only result in high interest rates but also significantly impact your personal loan eligibility. In some cases, lenders may reject loan applications from individuals with extremely low credit scores or a troubled credit history. Therefore, maintaining a good credit score is crucial to ensure loan approval and access to better interest rates.

Tips for maintaining a good credit score

a. Pay your bills on time: Timely payment of credit card bills, EMIs (Equated Monthly Instalments), and other dues is essential to demonstrate your responsible repayment behaviour.

b. Keep credit utilisation low: Aim to use only a small portion of your available credit limit. High credit utilisation can indicate dependency on credit and may negatively impact your credit score. 

c. Maintain a mix of credit: Having a healthy mix of credit types, such as credit cards, loans, and mortgages, showcases your ability to manage various credit obligations responsibly.

d. Regularly check your credit report: Review your credit report periodically to identify errors or discrepancies. Correcting any inaccuracies promptly can help maintain an accurate credit score.

To summarise 

Maintaining a good credit score by practicing responsible financial habits is essential for securing favourable interest rates. With a good credit score and the right financial tools like a personal loan EMI calculator, you can unlock better interest rates and achieve your financial goals more efficiently.

A personal loan EMI calculator helps estimate your monthly EMIs based on loan amount, interest rate, and tenure. This tool provides valuable insights into your repayment capacity, helping you make informed borrowing decisions and ensuring you don’t default on future payments, maintaining a healthy credit score. 

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.