Does personal loan affects credit score?

Personal Loan is an unsecured loan which is used to satisfy customer’s requirements. Personal Loan does not require any security or mortgage. Very easy documentation and quick disbursement process makes personal loan easily available to its customers. Approval of Personal Loan solely depends on the applicant’s income level and credit score. Credit Score/CIBIL Score measures the repaying capacity of the applicant. High Credit/CIBIL score which is 750 and above helps in higher chance of loan approval. But low Credit/CIBIL score reduces the loan approval process. You can try to improve your credit score. It is very important to maintain a descent credit score which is above 750, as it determines your creditworthiness for personal loan approval. 

There are 2 ways to affect credit score- Personal Loan and Credit Card.

Though credit cards are convenient, they charge a higher interest rates. On the other hand, personal loan charges comparatively low-interest rates. So, Personal Loan is the best way to affect Credit Score. 

Personal Loan affects credit score which are specified below-

  • Fixed Repayment Tenure- Personal Loan is repayed through monthly installment process. It is to be repayed within a fixed time period, generally 12-60 months. But credit cards are revolving loans with no fixed repayment term. So, swapping credit card debts with personal loan helps in increasing the credit score. 
  • Lowers Credit Utilization Ratio- Credit Utilization Ratio is the calculation of all revolving debt in comparison to credit left for you. Debt is not included in credit utilization ratio. So, if you repay your debt with the personal loan, it will positively affect your credit score.
  • Adds to Credit mix– Credit score is determined by 5 factors namely- Credit utilization ratio, Payment history, New credit inquiries, length of credit history and credit mix. 10% of customer’s credit score is based on his ‘credit mix’. Personal Loan helps in creating a mix of varied credit types. This helps in affecting credit score in a positive manner. 
  • Consolidation of debt– Personal Loan helps in debt consolidation and paying off the applicant’s credit card balances. This saves a lot of money of the customer as the rate of interest on personal loan is low compared to the credit cards. So, this boosts the Credit/CIBIL score.
  • No multiple loan application- If you apply for personal loan, it is followed by a hard enquiry which reflects on the credit score. Lower the hard enquiry, the lower negative effect on the credit score. So, its better not to apply for personal loan from a multiple financial institution. 
  • Personal Loan EMI-  Personal Loan is repayed through Equated Monthly Installments(EMIs). If you pay your installments on Personal Loan properly, it will positively affect your credit score. Delayed or missed installments affect your credit score adversely. You can use EMI calculator to get the details of your repayment schedule with respect to the loan amount and tenure. 
  • Loan repayment tenure- If you choose a long repayment tenure, and repay the loan amount timely, it will have a positive affect on the credit score. So, long repayment tenure with successful installment payments boosts the Credit/CIBIL score.

So, it is advisable to opt for Personal Loan to have a positive effect on credit score

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