A loan disbursal process diagnoses several parameters before assigning a borrower any credit product. One such parameter a lender keeps in mind before helping an individual with financial assistance is the credit score.
A lender checks this score when you apply for a loan. But why is your CREDIT score checked before loan approval? This article explores eight reasons why your lender scrutinizes your credit score.
Table of Contents
Loan Eligibility
An unsecured loan requires you to prove that you are eligible for applying for a loan. One way your lender can understand whether you are capable of getting a loan and repaying it on time is by checking your CREDIT score. Ideally, the best score falls within the limit of 750 and above. Anything below that is considered low and can affect your loan eligibility and lenders will think twice before giving you a loan. However, today, several fintech loan lenders give personal loans even for a low CREDIT score who fulfil other different criteria.
Loan Approval
Another reason for a CREDIT score check is to prove your creditworthiness. Before your loan application is approved, a lender will check your score to understand your repayment capacity and whether you can repay the total loan amount with interest. It serves as proof of credibility. Hence, the higher the score, the higher your credibility. A high credit score shows you have an excellent repayment record and can even speed up your loan processing time. In contrast, a low CREDIT score indicates you haven’t been regular in repaying EMIs, showing your irregularity and making it difficult for your loan to get approved.
Interest Rate
One of the leading factors that influence your loan’s interest rates is your CREDIT score. Individuals with great credit scores have higher chances of getting competitive interest rates. The interest rates highly influence the loan amount; hence, it is always essential to seek lower rates. Apart from this, an excellent CREDIT score can leave you in a position to negotiate good loan terms.
Loan Amount
The principal loan amount is the original borrowed amount. If you have a high credit score, you get the upper hand in unlocking a higher loan amount because the lender can trust you with their funds and get certainty about your repayment capacity. With this assurance, the lenders can disburse a high loan amount.
Credit History
Like browser history, everyone has a credit history that shows them their previous records of maintaining their credit product or service. Any defaults on repayments or late repayment reflect on your credit history and adversely affect your CREDIT score. One of the main reasons a lender looks at your CREDIT score is to check whether your credit history has been clear and void of defaults. Moreover, the lenders get an idea of your experience with credit products. This makes them get a better judgment of whether or not to trust you.
Debt Obligation
A credit report is like your report card for everything credit related. It reflects everything you do with your credit product, like a loan or a credit line. So, even if you have been a guarantor for someone, it will showcase in your credit report.
As a guarantor, you don’t need to repay loans, but if the person for whom you are a guarantor misses an EMI, your CREDIT score is affected. Moreover, their repayments become your responsibility, increasing your debt-to-income ratio. Hence, it is necessary for lenders to check your credit score to assess your current debt obligations to understand whether you are capable of repaying another loan.
New Loan Requests
If you continue applying for loans simultaneously, you will be seen as a credit-hungry individual, and lenders tend to run away from such customers. Moreover, new credit negatively impacts your CREDIT score for a short period. It makes you a risky borrower as you will have many credit products to repay. Hence, this is another reason why lenders conduct a CREDIT score check to see how many new loan requests you have applied for.
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Special Offers
Lastly, borrowers with a high credit score get to reap many more benefits apart from a high loan amount and low-interest rate. These benefits are packed with special offers. Lenders appreciate individuals with a high credit score as they are assured of getting back their borrowed funds on time. It also encourages them to bestow special offers like offers on credit cards, pre-approved loans, flexible loan repayment options, etc.
Importance of a High Credit Score
Maintaining an excellent CREDIT score is essential to enjoy benefits like higher principal loan amounts, lower EMIs, and flexible interest rates and loan tenure. Apart from that, whether or not you are applying for a credit product, taking care of your credit score is an important financial habit to form.
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Author Bio: Tanvi Kaushik specializes in Content Marketing and works with the Digital Team at KreditBee – India’s fastest personal loan platform where self-employed and salaried professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Tanvi writes to-the-point articles on personal finance and budgeting which are truly appreciated by her readers. She is committed to making money matters easy to understand even for the layman. Her commitment to her work doesn’t stop her from pursuing her hobbies of hiking, trekking, and going on adventurous trips.
