Impact of Personal Loan on credit score


One of the most common words thrown into our vocabularies as we grow up is ‘credit score’ and it is very important to know how it may impact your financial planning. Before we move forward to understand how taking a personal loan can directly impact your credit score, you should know what it is how it is calculated.

What is Credit Score?

In easy terms, a credit score is a three-digit number that represents the probability of you paying back your loan / bills on time. There are various different scores and algorithms to calculate but they typically are between 300 and 850, with higher scores representing more favourable credit terms. CIBIL Score is the most widely used score in India and is calculated from the credit history found in the Credit Information Report (CIR) which is your credit payment history gathered from different institutions and loan types.

Why is your credit score important?

If you’re wondering why is credit score such a big deal, the answer is simple - Most lending institutions in the formal sector will consider your credit score before sanctioning a loan to you, whether it is a bank, a credit card company or a car dealership. Hence, those with higher credit scores have more probability of being sanctioned a loan and with more favorable credit terms. However, with FastALoan, you do not have to worry about how high your credit score is or whether it even exists to be able to receive a loan. We believe that each individual should have access to small cash to get through financial emergencies, and our operating model lives up to this philosophy.

Before diving in for that personal loan, you should know how it will impact your credit score. Having a good credit score is the modern-day equivalent of having a telephone considering our reliance on credit cards and personal loans to get through life.

How can a personal loan impact your credit score?

Now that you’re familiar with all the credit score basics, let us try and understand how it can be impacted by your personal loan. If you’re worried thinking about the consequences of taking a loan online, don’t be! If you’re responsible about paying back your instalments in time, your credit score can even improve . An individual’s payment history is the most critical factor that goes into calculating their credit score and timely payments will give a positive boost to your payment history, which will positively impact your credit score. However, it is important to steer clear of many myths that surround the domain of credit scores. For instance, many people believe that taking a personal loan will negatively i,pact their credit score, which is as far from the truth as you can imagine. Many young working professionals are now looking for ways to improve their credit score so it becomes easier for them to take a home loan, car loan, education loan or personal loan.

Tips to improve your credit score

What people seldom know is that there are some small tips and tricks you can keep in mind if you wish to improve your credit score. We have listed down a few for you below -

(1) Don’t apply to multiple vendors - Each time you get rejected for a personal loan, your credit score dips and so does your chance of receiving a loan. Do your research and apply to only those places where you know you are eligible and the finances will suit you.

(2) Choose a personal loan amount that doesn't make you nervous - Make sure you’re getting a loan sanctioned only for an amount that you can easily pay off.

(3) Calculate the EMI:NMI ratio : After you know the EMI instalments, you should do a quick calculation to ensure that the EMI amount is not more than 40-50% of your net monthly income.