Importance Of Credit Report In Personal Loan Sanction
Understand why your credit report plays a crucial role in the approval process for personal loans. Learn how lenders use it to determine your loan eligibility and terms!
As an individual one has various options to meet their short-term emergency cash needs. In an ideal scenario, one should have a small savings in reserve for such requirements either in cash or in the bank or parked in some liquid saving instruments that can be accessed quickly if needed.
But for those who do not have a recourse to such savings, there are borrower-friendly loans available from banks and non-banking finance companies (NBFCs). These loans come in various forms and allow one to have the freedom to use it as one wants without bothering about the embarrassment of asking friends and family for money.
One of the most common forms of such loans that an individual can take out is the personal loan. These are unsecured or collateral-free loans offered by lenders to individuals. Since they do not come tagged with any security, lenders need to look at the creditworthiness of the borrower to assess a loan application.
This creditworthiness has various elements but lending institutions tend to focus on certain basic filters to process an application. In particular, they look at the credit history of the person and this is done via the credit report.
The credit report captures aspects such as past behaviour with respect to loans availed, repayment track record and defaults, if any, to check how disciplined one is in servicing debt. The report also tracks current outstanding loans as it affects the ability of a person to handle new loans and its interest dues and so on.
It also factors the credit cards in use by the borrower as it is also another type of borrowing. Here, an important thing is that one is not required to pay back the full amount due every month. If one has been paying back the ‘minimum amount due’ every month for using the card, that it good enough.
The most important aspect of the credit report is the credit score, which is a three-digit numerical that is generated for each individual in the financial system. This number lies in the range within 300-900 with a lower score denoting a person with low creditworthiness and vice versa.
Lenders look at the credit score of a borrower to assess how likely is that the loan will be repaid in full and within the time period it has been availed for.
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Importance Of Credit Report
In certain types of loan called secured loans, such as an automobile loan or a home loan, the loan is granted with the ownership of the asset pledged with the lender. Given the fact that a personal loan is an unsecured loan, or a loan without any collateral, the financial agency advancing the money checks the credit history and credit score to determine the creditworthiness of the borrower.
While there is no guarantee that a person with high creditworthiness will return the money with all dues as per schedule, the credit report and credit score do provide one signal from past behaviour on how the borrower may act in the future.
The basic principle that lenders use is that if a person has a credit score of 750 or more then he or she meets the threshold of creditworthiness.
Notably, a lower score or a default with some loan in the past does not make one ineligible from availing a personal loan. For example, NBFCs are more flexible with their lending practices and usually accept loan applications from those with a poor credit report or low credit score, though they may increase the interest rate to cover for the additional risk they take by lending.
Commercial banks, on the other hand, typically track the credit report and the score more stringently. So, there is a high probability of a bank rejecting a personal loan application if the score is below 700-750 level or one has had a default in the past. This stands true even if the loan applicant’s income is much higher than what’s required to service the equated monthly installments (EMIs).
One should remember that a good credit report and high score is not just important to get the personal loan application approved but also matters for:
• Quick approval
• Lower interest charges
• More flexible payment terms
• Eligibility for a larger amount
As a result, borrowers need to focus on pushing up their credit scores to benefit from higher deemed creditworthiness in the eyes of the lender for availing a personal loan.
A personal loan is a collateral-free loan where the borrower does not have to furnish any security. Due to this reason, lenders base their decision to approve or decline a personal loan application on the credit report and thereby the credit score of the applicant.
The credit score does not just determine the approval of the loan but a higher score translates into lower interest charge, quicker approval, eligibility for a higher loan amount and convenient repayment terms.
IIFL Finance offers personal loans of up to Rs 5 lakh for up to 42 months without the need to bring any security through a swift digital process. Moreover, it provides the most competitive interest rates to borrowers with high credit scores.
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