To meet your short-term monetary needs, there are distinct options available in the market. In an ideal situation, you must hold a financial backup in the form of an emergency fund in your savings bank account for financial needs. But if you are one of those with no financial backup, you are left with only one option i.e., hit on the personal loan apply option. Such loans do not require you to provide any collateral and they permit you to use the disbursed loan proceeds for your varied needs. However, as they are unsecured in nature, lenders consider reviewing your credibility by fetching your credit report to determine your creditworthiness and repayment potential to fix the personal loan interest rate on the loan accordingly.

  • Importance of a good credit report

As a personal loan requires no security for the approval and disbursal of your loan proceeds, the sole parameter that lenders use to determine your credibility is your credit score. While there is zero assurance that if you hold high credibility, you will repay the outstanding dues according to the schedule, still your report check is mandatory for lenders as it reveals your previous credit behaviour, which allows them to determine how your repayments would be. So, if your credit score is 750 and above, this means you meet the credibility threshold, and most lenders may agree to approve your personal loan application request. 

Notably, a slightly lower credit score or default on a few loans does not necessarily infer outright personal loan application rejection. However, this puts you in the high risk category and to compensate for the high risk in lending to you, many lenders may charge a higher personal loan interest rate and other charges. Note that in a few cases, some lenders on evaluating your risky credit profile may turn down your personal loan application too. 

So, it is recommended to always maintain a high credit score as the need for a personal loan is uncertain and can knock on your door at any time. In scenarios when a personal loan need is immediate, it may be difficult for you to instantly increase your credit score if it is low. This is because building a score takes time and patience and, in a few cases, it may even take over a year. You can improve your credit score by following credit-healthy activities. These include timely repaying your credit card dues and loan EMIs in full, maintaining a balanced mix between secured and unsecured credit options, maintaining a credit utilisation ratio of within 30 per cent, constantly keeping a track of co-borrowed and guaranteed loan accounts for their timely repayments, and periodically fetching and reviewing your credit report to detect any errors or mistakes.

Ending note

A personal loan is an unsecured credit option wherein you do not require to furnish any collateral to avail the loan proceeds. Owing to this reason, most lenders depend on your credit report to determine your personal loan eligibility chances. Your score does not only determine your loan approval chances but even tends to provide you with a lower processing charge, affordable personal loan interest rates, quicker approval, convenient personal loan EMIs, repayment tenures, and eligibility to avail higher loan proceeds. 

However, before you hit on the personal loan apply online option, ensure to use an online personal loan EMI calculator to compute your personal loan EMI, preferred tenure, and rate of interest as per your repayment potential. Based on these computed figures, ensure to negotiate with the selected lender to avail a suitable loan deal.

Additional Read: Here's how a personal loan can be a smart choice for millennials

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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.