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A Personal Loan is a loan that any individual can avail of for various reasons and are at liberty to use this loan amount at their discretion. Simply put, Personal Loans can be used in a manner that suits the borrower’s desire, without being answerable to their lending institution. It differs from other types of loans like Professional Loans, Home Loans, or Doctor Loans that are spent for specific things.
Personal Loan and Credit Score – How are they related?
A credit score is a value that predicts the likelihood of you paying back a loan on time. This value is generated from the information on your credit report. The higher your credit score, the better deals you will get on your loans. A good credit score will help you get the right loan at a healthier interest rate for yourself.
But what is the relationship between a instant personal Loan and a credit score? A Personal Loan has an impact on your credit score. It is for you to decide whether this impact is positive or negative. If you follow the right process and make financially intelligent decisions, your credit score will improve after taking a Personal Loan. But it can also harm your credit score if you are not careful.
Let us explore both of these scenarios further.
Favourable Situations for Getting Personal Loans
We will first see how you can improve your credit score through a Personal Loan.
- A good payment history – If you pay all the installments of your loan on time, you will build a good payment history for yourself. A good payment history improves your credit score as it shows that you are a competent customer who is punctual in repaying the loan. It also assures the financial institution or lender of your repayment capacity and builds your trust value.
- Credit Mix – Credit mix refers to the different types of loans or credits you are currently paying. Adding a Personal Loan to this will also improve your credit score, given that you are repaying all your loans and credits in time. It shows your financial partners that you have good experience in handling debt and do so responsibly, which is what they like to see. Hence, adding a Personal Loan to your credit mix will improve your credit score.
Unfavourable Situation for Getting Personal Loans
Let us look at ways where your ability to get a Personal Loan could be affected by your credit score.
- Hard Enquiry on Credit Report – Each time you avail of a loan, the financial partner conducts a hard inquiry on your credit report. The more loans you have, the harder inquiries you will have on your account, which can decrease your credit score. Therefore, getting a hard inquiry is inevitable if you take a Personal Loan. The wise thing to do is to maintain a good credit score and ensure that you don’t take out multiple loans simultaneously.
- Excessive Debt – It is not advisable to take a Personal Loan if you are already sitting on a mountain of debt. It will negatively impact your credit score. Furthermore, it shows your financial partners that you don’t manage debt properly and might incur more debt to pay off the previous one. While some circumstances in life may push you to sit on a debt pile, it does not bode well for you in the long run. Therefore, you should avoid taking a Personal Loan if you are already under debt stress.
Conclusion
As you can see, having a Personal Loan is not as bad for your credit score as it might appear. It purely depends on the financial choices you have made for yourself. Your credit score will fluctuate depending on these choices and the financial responsibility you show as a customer. A Personal Loan prevents you from having a bad credit score and allows you to improve it if you follow the right plan. You can also use a Personal Loan EMI calculator that can help you choose a suitable loan wisely.
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