“If you don’t take good care of your credit, then your credit won’t take good care of you” – Tyler Gregory.
A personal loan is a lifeguard in that moment of crisis or whenever you face any financial emergency. An instant loan gives you immediate access to cash when you need it the most. But you need to be extremely careful when you borrow money. As long as you are judicious in your borrowings and disciplined in repaying them, a personal loan is a fantastic product with numerous benefits.
But if you borrow recklessly or fail to make timely repayments, you may end up paying a heavy price for your lapse. Fines & penalties apart, you lose something more valuable i.e.your reputation. What takes years to build can get destroyed in a few days. You must exercise great care and caution when you apply for instant loans to maintain a sound financial reputation.
How do Personal Loans Affect Your Credit Standing?
When you borrow money or take up more debt, it can affect your creditworthiness in multiple ways. It is like a new entry in your list of financial transactions. When you have more & more debt to service, it adversely affects your credit rating. For instance, you already have housing and car loans. The EMIs may consume more than 50-60% of your monthly salary. Now the lender perceives higher risk of default due to a higher loan burden on the customer. So your application for an instant personal loan online may get rejected. It is not just the new loan application but your complete credit history & credit behaviour that is important in deciding your credit rating.
Different Ways in Which Personal Loans can Impact Credit Scores
A personal loan by itself is not something negative. It all depends on how you manage your borrowings and deal with them. Some of the factors that can adversely affect your credit score are:
Missing the EMI Payments
Before applying for a personal loan, please figure out the maximum EMI you can commit monthly. Your income may be fixed or irregular. Certain expenses, like rent, utility bills, school fees, etc., cannot be avoided at any cost. When applying for an online personal loan, you must give the lender an ECS mandate. If there is no sufficient bank balance on the given date, the EMI is missed. It is recorded as default, and you may be levied a penalty for missed or late payments. The more you miss the EMIs, the greater the negative impact on your credit score. So it gets more difficult to borrow in the future as you lose the trust of the lenders.
Multiple Personal Loan Accounts
When you have multiple loans to service with a fixed income, there is a greater possibility of default. If you borrow too often and apply for new personal loans online before you close the existing ones, it sends a signal that you are not responsible enough with your finances. Lenders can quickly assess your debt track record with the help of a credit report. More loan inquiries in a short time span are definitely a red flag for lenders.
Quantum of Borrowings
It’s not just the number of loans you have but also the total amount you have borrowed that is important. You may have just one personal loan in your name. But if that amount is substantial relative to your income base, it can affect your credit rating. If you then make a fresh loan application, it is likely to be rejected. The vast amount owed gives an indication to the lender that you may struggle to pay off the debt in time.
Existing Credit Mix
When you apply for an instant personal loan online, the application may get rejected despite a decent payment track record. It is because you have a wide variety of loan accounts in your basket. You may already have a housing loan, a car loan, an education loan, and some credit card dues. Then if you make a fresh personal loan application, your credit rating takes a hit. It is because your credit history & behaviour may demonstrate that you are a compulsive borrower.
Length of Credit History
First-time borrowers often lack a credit history. But if you have a long & healthy track record of regular loan repayment, it can boost your credit rating. In fact, personal loans can help you build a track record if you have none. Before going for the big-ticket housing loan/car loan, you can borrow small amounts through online personal loans and repay them on time. Make sure you maintain a proper balance and do not borrow frequently.
Personal Loans Can Help Your Credit Score
- Regular and consistent loan repayment over a long period of time helps you build a good track record as a borrower.
- If you have never borrowed, you have nothing to show and prove. You can use personal loans as a tool to improve your credit score before you borrow more enormous amounts, like a home loan.
- Personal loans can help you manage debt better if you can use them to close high-cost debt like credit card dues or hand loans.
Note: A personal loan is an unsecured borrowing, i.e. you don’t need any collateral security. The two most important things you need to avail of a personal loan are (i) Regular Income and (ii) Good Credit Score.
Just like any other product, a personal loan has its pros & cons too. It is in your hands to utilize them productively. An instant loan can be an ultimate saviour when you are plunged into a crisis and find it tough to access funds elsewhere. Money is of little value if it cannot help you when you need it the most. But on the flip side, you may find yourself in deep trouble if you borrow recklessly and fail to repay on time. A credit score report is not just a supporting document. It is your financial character certificate!