Suppose you are planning a vacation with your family, for which you need a personal loan. However, when you go to the bank, they reject your loan application, stating that your credit score is not sufficient. Now, the question that may come to your mind is, what is the minimum CIBIL score required for a personal loan?
In this blog, we will understand how much credit score is required for a personal loan, how to maintain it, and its benefits. We will also see why a credit score is necessary for a personal loan. So let’s get started.
Credit and CIBIL Score for Personal Loan
Before getting into the minimum credit score required for a personal loan, let’s first understand what a credit score is.
When you apply for any personal loan with any lender, the first and most important criterion they check is your credit score. It is a three-digit number between 300 and 900, used to measure your creditworthiness. It is calculated based on various parameters such as current outstanding debt, credit utlization, repayment history, etc. These credit scores are given by credit bureaus such as CIBIL Transunion, CRIF, Experian, Equifax, etc. Each credit bureau has its own method of calculating the credit score; hence, it is no wonder your credit score will vary in different credit bureaus.
Your credit score acts as a first reference point, which enables lenders to check your creditworthiness. If you have a high credit score, then it means you are a creditworthy borrower, and lenders will be assured they will receive their money back. However, if you have a bad credit score, the lender may perceive you as not a creditworthy borrower and may deny in providing a loan.
Minimum Credit Score for a Personal Loan
How much CIBIL score and Credit score is required for a personal loan? This is one of the most common questions that every loan applicant has.
The minimum credit score required for a personal loan varies from lender to lender and other requirements. However, to avail of a personal loan, typically, you must have a credit score equal to or above 750.
Minimum Credit Score as Per the Credit Agencies:
- Experian: For lenders preferring Experian credit score, if you have a credit score above 750, it is considered good, and you can avail of a personal loan at favourable terms.
- TransUnion CIBIL: In the case of Transunion CIBIL, a credit score above 649 is considered good. With this score, you can easily access various types of credit products.
- CRIF Highmark: A credit score above 700 is considered good in the case of a CRIF Highmark.
- Equifax: If your credit score is equal to or above 670, it is deemed good by lenders who prefer Equifax.
However, If your credit score is lower than the preferred range, you may still have options for a personal loan. But in this case, lenders may charge you higher interest rates. So, in this scenario, you must evaluate all the alternatives available and select the one that fits your bill.
Alternatively, you can explore other options, such as NBFC or Non-bank financial companies, Digital Lenders, Peer-to-peer lending platforms, or loans against Gold or Mutual funds for personal loans, in case you do not have a minimum credit score.
Why Should you Maintain a Minimum Credit Score for Personal Loan?
Maintaining a minimum credit score is essential for getting any type of personal loan or credit card from the lenders. To understand why maintaining a credit score is important, we must understand its benefits. Here are some of the benefits of maintaining a minimum credit score for getting Personal Loan.
Reflects your creditworthiness: Lenders use credit scores to evaluate your creditworthiness, which helps them assess whether you can repay. If you have maintained a minimum credit score, lenders may perceive you as a risk-free borrower and offer you a loan easily.
Faster loan approval: One of the most important benefits of maintaining a minimum credit score is that you get access to personal loan approval very quickly and easily. Also, sometimes lenders may offer pre-approved loans, wherein you get the loan in a few simple clicks with less or zero documentation.
Loan at lower interest rates: Your credit score plays a significant role in determining the interest rate for your loan. So, if you have maintained a good credit score, then lenders may offer loans at lower rates. However, if you have a lower credit score than the required one, then you may have to bear high interest rates.
Approval for higher loan amount: A high credit score lowers the risk for the lender by indicating responsible financial behaviour, which increases the possibility of getting approval for a higher loan amount.
Now that we have understood why maintaining a minimum credit score for a personal loan is important, let’s proceed further to understand how you can maintain this.
Tips to Maintain a Minimum Credit Score
Maintaining a credit score is an ongoing process that demands regular monitoring. Here are some tips to improve credit score:
- Make on-time payments: One of the most important factors that affects your credit score is your past payment history. If there is any default or missed payment in the past, then it impacts your credit score negatively. Hence, you should make all your debt payments (loan or credit card) on the due date.
- Reduce credit utilisation: Try to keep your credit utilisation very low compared to the approved credit limit. Typically, utilising only 30% of your total credit is advisable. High credit utilisation can signal financial strain and negatively affect your credit score.
- Do not apply for loans frequently: When you apply for any loan or credit card, the lenders access your credit score, which is considered a hard enquiry. If there are frequent hard inquiries in a short span of time, then it may impact your credit score negatively. Hence, you should avoid applying for credits frequently.
- Diversify your credit mix: If your credit portfolio is inclined towards only unsecured loans like personal loans or credit scores, it may negatively impact your credit score. Hence, having both loans (Secured and unsecured) in your credit portfolio is advisable.
- Regularly check credit score: Lastly, it is important to check credit score regularly. If you identify any errors in the credit report, you should approach the credit bureau or lender to get it corrected.
Why does the Credit Score Matter for a Personal Loan?
The credit score doesn’t just matter for personal loans; whenever you apply for any loan, you’ll need a good credit score, whether for a home loan, car loan, or education loan.
Your credit score reflects your creditworthiness to the lenders, allowing them to determine whether you will likely repay their money. Credit scores are calculated based on various parameters such as credit utilization, past payment history, credit mix, inquiries, etc. So, if you have a good credit score, you are a creditworthy borrower, and the lender will agree to provide you with a loan easily. But if your credit score is lower or doesn’t meet the lender’s criteria, you may not be approved for the loan.
In addition, a good credit score helps you get a higher loan amount easily. Also, it enables you to get loans at favourable credit terms, such as lower interest rates and longer loan tenures.
Conclusion
In conclusion, A good credit score ensures your loan is easily approved on favourable terms.
Hence, it is important to know your credit score as it gives you an idea of whether you can avail credit from the lenders. As we have seen above, your credit score should be at least 750 or higher for any personal loan, and you should try to maintain it. And, if your credit score is below 750, you should take proactive steps to improve your credit score.
Frequently Asked Questions
What minimum credit score is necessary to qualify for processing a personal loan?
To be eligible for a personal loan, you should have a credit score equal to or above 750, which most lenders prefer. However, if you have a lower credit score, you may also apply for a personal loan, but you may have to pay a higher interest rate.
How can I apply for a personal loan if my credit score is low?
If you have a low credit score, you may face issues getting approved for a loan. Even if you are approved for a loan, you may have to pay higher interest. Apart from this, you may have to provide collateral and involve a guarantor or co-borrower with a good credit score.
Can I apply for a personal loan if I don’t have a credit score?
If you do not have a credit score, it may not be possible for you to avail loan. In this scenario, you should work on building your credit score by taking credit builder loans offered by various banks. Alternatively, you can take a personal loan via P2P lending platforms, a loan against gold, or a loan against mutual funds.
What are the implications if I don’t have a credit score?
If you don’t have a credit score, it will be difficult for you to avail any type of credit, such as credit cards, personal loans, education loans, etc., in the future. Hence, you must build your credit score.
Can I get a personal loan with a credit score of 650?
Yes, you may get a personal loan if your credit score is 650, but in this case, you may have to bear higher interest rates.
How much EMI will I have to pay if I have a good credit score?
If you have a good credit score, you can receive loans at a lower rate. However, your loan EMI calculation depends on the borrowed amount, interest rate, and loan tenure. If you have all these values, you can use our personal loan EMI calculator to calculate your EMI.
