Want to apply for a loan? Wondering if you can repay your dues comfortably? A credit score is a three-digit number that reflects the repayment capacity of an individual. It ranges from 300 to 850, with higher scores indicating better creditworthiness. In other words, a credit score is like your financial grade card. Credit scores are an important component of the loan application process because they help lenders assess the risk of lending to a borrower. An excellent CIBIL score guarantees flexible loan terms and lower interest rates.
Minimum credit score required for loans
There is noideal credit score that would guarantee you your desired loan amount. Lending firms take into account other factors like your income, debt-to-income ratio, and credit utilization before approving your loan request. Generally, the range between 630 to 689 is viewed as a decent credit score. Ideally, you should aim for a score of around 720 to 750 and above to obtain better loan terms
Having good credit scores and a long credit history implies that you have a good record of paying back debts, thereby assuring lending firms that you will be able to repay their loan amount. However, if you can get approved for a higher loan amount than you actually require, it may be a good idea to re-evaluate if you need the excess funds. Consider your needs carefully and only borrow the amount that you absolutely need. Start by creating a detailed budget that includes all your income and expenses. This will help you see how much money you have available to pay back the amount and may help you identify areas where you need to cut back on spending.
Importance of credit scores when applying for loans
Credit scores play a very important role in the loan sanction process because they reflect the creditworthiness aka the repayment capacity of the borrower. Here are some reasons why credit scores are of utmost importance when applying for loans.
- Credit scores impact loan approvals
A high CIBIL score indicates that the loan applicant is responsible and has the repayment capacity to pay down their debts. They are viewed as low-risk borrowers, meaning that they are more likely to pay their EMIs on time, while high-risk borrowers are those with low credit scores, indicating poor financial management.
- Credit scores also help in securing better loan terms
Credit scores determine the interest rates and terms of the loan. The reason why poor credit scores are frowned upon by lending firms is that they indicate the borrower’s inability to pay back debts on time. It brands them as risky borrowers. You can secure lower interest rates and flexible repayment terms with good CIBIL scores.
- Credit scores reflect your ability to handle debt
Credit scores are based on factors like payment history, credit utilization, length of credit history, type of credit, and new credit taken. Late payments or missed payments or defaults on a loan indicate poor a lack of financial responsibility and instability in income. High credit utilization may also lower your credit scores as they indicate that you rely too heavily on credit lines to stay afloat. A mix of different credit lines like mortgages, credit cards, and loans, where you pay your dues on time, can help build a healthy credit history over time.
You might be wondering if you missed your chance to secure good loan terms if you have poor credit scores. Absolutely not! You can begin improving your credit scores anytime. Keep track of your expenses and make sure that you do not go overboard. If you have multiple ongoing loans, you can consolidate them and pay them down. Also, before applying for loans, check your credit reports thoroughly for any discrepancies.
Eligibility criteria to apply for loans
The eligibility criteria for loans can vary depending on the type of loan and the lender. Here is a list of common factors that lending firms typically consider before giving out loans.
- Credit scores
Good credit scores are an indispensable factor when it comes to getting approved for loans. Lenders will assess your credit scores to check your ability to repay the loan amount.
- Debt-to-income ratio
If you have multiple ongoing loans, you may find it difficult to secure funds. Lending firms will want to make sure that you have enough income to pay all your EMIs every month. Ideally, you should not spend more than 60% of your income on paying monthly settlements.
- Income and employment status
You will be required to submit proof of income like salary slips, business address proof, or payment invoices because lending firms will assess your income to check if you have enough spare at the end of the month to pay EMIs.
Lending firms may not give you a loan if you exceed the age requirements or if you are not from a certain nationality. You must be above 18 years of age to apply for loans in India.
If you have poor credit scores and are unable to secure your desired loan amount, try putting down collateral, or apply with a co-applicant. The collateral will ensure that the lending firms get back their loan amount in case you cannot repay it. And, if your co-applicant has better credit scores, you may get better loan terms.
Credit scores are not only essential when applying for loans, but may also affect your ability to get approved for credit cards, secure favorable insurance terms, and may cause you to lose your job in certain sectors. If you want to learn how to improve your credit scores and take charge of your finances, head to Andromeda. You can read informative articles on their official website or consult with their experienced professionals to improve your credit scores