Credit score plays an important role in your personal loan application. But what’s the minimum score that one needs to get qualified for a loan? ⭐Personal Loans ⭐Financial Tips
We often save money to keep ourselves covered on rainy days. Sometimes when an emergency knocks our door, those savings don’t suffice. This is when people resort to a loan. People take personal loans to bridge such financial gaps. A personal loan is a type of loan which you can get without declaring an asset as security against it. These loans potentially provide more credit than a credit card, usually at a lower interest rate.
However, unlike some forms of credit lending, personal loans require a credit check, which majorly takes your credit score in to account. Your credit score is a rating given to you, based on your credit report. Your financial history, including payment history as well as credit history, contribute significantly towards your credit score.
When it comes to credit scores, different lenders have different eligibility criteria. So what credit score do you actually need to qualify for a personal loan? We’ve broken down the concept of credit scores for your understanding.
The ideal score
Contrary to what people believe, there is no concrete value that defines a good credit score. Different Credit Reporting Agencies have different scoring criteria. For instance, Experian marks credit scores out of 999, whereas TransUnion and Equifax mark credit scores out of 710 and 700, respectively. Thus, you can have different credit scores from different agencies.
As per Equifax’s scoring model, a credit score that ranges from 580 to 669 is generally considered ‘fair’. A ‘good’ score could range anywhere from 670 to 739. An ‘above average’ or ‘very good’ credit score would lie between 740 and 799. Anything above 800, is as an excellent score. If your credit score is ‘very good’ or ‘excellent’, it indicates that you’ve exhibited responsible credit behaviour in the past. This encourages lenders and increases the chances of approval for your loan application.
Experian’s model scores out of 999. A score ranging between 0 and 560, would be considered ‘very poor’, indicating that the chances of approval will be narrow. Someone with a score between 561 and 720 falls into the ‘poor’ credit score category. In this case, your application for loan or credit may get approved, but at a higher interest rate. For people within the ‘fair’ range of 721 to 880, credit limits may not be very generous. If your score is between 881 and 960, you’re ‘good’ to go for most credit cards, loans and mortgages. However, the best of deals may still be a sight to view from afar for you. Now if your score is above 960, you’re an ‘excellent’ candidate for any mortgage, loan or credit card, wherein you can avail the best deals. This would indicate that you’ve demonstrated a highly responsible credit behaviour in the past, so it is bound to improve your chances at a loan.
How does a lender judge my score?
More often than not, lenders consider applicants with a score of 670 and above, as ‘lower-risk’ borrowers. Applicants whose score lies between 580 and 669, are usually considered ‘sub-prime’, implying that they may not be eligible for better loan terms. While those below 580 would be categorized as having ‘poor credit’ and would have a very slim chance at qualifying for better loans terms or getting credit altogether.
Just like Credit Agencies, lenders have their own set of terms while assessing loan applications. While you may be the ideal candidate for one lender, you may not be a good fit for another. But for qualifying for a loan, it is imperative that you have at least some creditworthiness, which is determined based on your income, credit history and credit score.
Having said that, again, credit score requirements for eligibility of a loan are pre-defined by different lenders on their own terms. But in most cases, you will need a score between 550 and 580 to qualify for a personal loan. However, know that your lenders will not give you the best deals on the table with this score.
What impact will your credit score have on a personal loan application?
When it comes to a personal loan, lenders would want to minimize the risk of default. Following is a rough idea of what sort of an answer you could expect against your personal loan application, based on your credit score:
- Under 600: You will most likely be left with the option of ‘poor credit’ loans as very few lenders will consider your application. However, with the deals offered to you might have an exorbitant interest rate – perhaps 30% or more.
- Between 600 and 700: The higher your score, the better deals you will be offered. This range usually qualifies for most lenders and creditors.
- Above 700: You will fulfil the criteria of most of the cream lenders and creditors. So you can easily expect a lower interest rate towards your loan.
Tips to keep a healthy credit score
- Make timely repayments in full and avoid defaults.
- Your electoral roll registration should be up-to-date to improve verification.
- It is good to have some credit history. This helps in building your credit score.
- Maintain minimal credit utilization.
Once you reach your target score…
- Space out your credit or loan applications and create healthy gaps. Too many applications in a short span could lead to a decline in your score. Do not reapply for a loan within 6 months of your last application.
- If you have any unused accounts, cease them immediately. It may be contributing towards your credit limit. Your overall credit limit should be low.
- Avoid delinquency at all costs. Try and maintain a neat payment history.
- Borrow only when you know you can handle it. This will prevent you from falling into a debt trap.
- Check your credit report regularly to look for any discrepancies that could lead to fraud.
We want to help you gain insight into factors influencing your credit score and how to bounce back from a personal loan rejection. Visit LoanTube for some useful insights and share them with your dear ones to help them gain better control over their finances.