A sudden need for money can prompt you to take a personal loan. Easily available without the need to offer collateral for a loan, one can easily obtain a personal loan from any lender including financial institutions. While you may submit a loan application form hoping to pay off your lingering bills with the amount or use the money for home remodeling, taking care of medical expenses, debt consolidation, etc., managing a personal loan smartly can help improve your credit score.
Exploring the interdependence between a personal loan and credit score
Many lenders would tell you the benefit of having a good credit score while applying for a personal loan. The fact that a high-rating credit score can assure you a loan amount of your choice at lower interest charges is well known. Considering that most lenders consider your CIBIL score as an essential parameter of your credibility, you must ensure a good credit history.
How Personal Loans Improve Your Credit Score
However, not many are aware that taking personal loans not only assures of the much-needed finances on time but also improves their credit score.
Get rid of your old debts: Loans taken from multiple sources and piling credit card debt means growing liability. Instead of reeling under the burden of debt, taking a personal loan and repaying all of them at once helps. This implies taking a new personal loan to settle your old dues. Repayment of old debt within the loan tenure or foreclosing them with a timely inflow of funds has a positive effect on your payment history, and thus, your CIBIL score.
Ensure repayment of your loans: It makes sense to choose a loan amount that you need and not what you want. This is because personal loans come at high-interest rates, thus, requiring you to repay more than what you had borrowed. Since the loan must be repaid in equated monthly installments (EMIs), it makes sense to pay your loan interest on time. Timely repayment of interest on loans means that you have a good credit history, thus, implying a high credit score.
How to Use Personal Loans to Improve Your Credit Score
If you do not have a credit history, then taking a personal loan can help improve your credit score in the long run. However, you also run the risk of running into debt owing to high-interest charges stemming from the unsecured nature of the loan amount. Keeping in mind the following essential facts can ensure you a good credit score with the personal loan taken.
Choose your lender carefully: Ensure that your lender enjoys credibility before applying for a personal loan. This will save you from unwarranted stress synonymous with loans taken from unreliable sources. Whether you apply for personal loan online or approach the nearest branch for the loan, borrowing money from a trustworthy source lends a positive note to your credit history.
Refrain from taking multiple loans: Not all liabilities be repaid with a loan amount. This means that you should not be running to every possible lender with a loan application. Prefer to take only one loan, which will make it easier for you to repay the amount. Also, every time you rush to take a loan, your credit history will be sought. Too many borrowings are deemed negative, thus, impacting your credit score badly.
Don’t opt for a big loan amount: Before submitting your personal loan documents to a financial institution, make sure of the amount that you wish to borrow. Too big of a loan amount can make repayment difficult, while a small loan can be paid off easily, thus, taking your credit score a notch higher.
Pay your interests regularly: There is a risk of default on interest payments if they are too high. Before taking a loan, gauge the interest that you would be required to pay by using the personal loan EMI calculator available online. Evaluating the interest beforehand will help you assess your readability to repay the loan, thus, leaving no scope of delaying or defaulting on your EMI payments.
Don’t pre-pay your loan: A sudden windfall may prompt you to foreclose the loan. However, this is disadvantageous from the credit building point of view. Choose to pay your interest throughout the entire loan tenure. The ability to make regular payments throughout the entire loan repayment period ensures a better credit score at the end of the loan repayment cycle.
Avoid falling into more debt: Taking a personal loan and repaying it with regular frequency pushes your credit score to a higher level. This may prompt you to experiment with other loans, thus, pushing you into further debt and impeding your ability to pay your EMIs on time and pulling down your credit score. Eligibility for further loans must not translate into an obsession for taking more loans.