How your credit history can unlock better personal loan terms

• A high score broadens your choices, as more lenders may be willing to offer you better terms.

In life, there are moments when urgent funds are needed. For example, for meeting unexpected medical costs or other financial emergencies.

For many individuals, personal loans help plug the gap, as they are easier to access and come with flexible terms.

A growing trend shows that "credit-savvy consumers," who actively monitor their credit, are making the most of available financial products. These consumers are 5.8 times more likely to open new credit lines within just 3 months of starting credit monitoring, according to TransUnion CIBIL Report - Empowering Financial Freedom: The Rise of Credit Self-Monitoring in India. Among these new credit lines, personal loans are the most popular, accounting for 41 percent of new credit lines within the first 3 months of monitoring.

Additionally, data shows that about 46 percent of credit-savvy consumers see improvements in their scores within just 6 months of actively monitoring their credit. Regular credit monitoring can help you stay on top of your financial health and seize opportunities as they arise.

You can avail of a personal loan based on your income statement and credit profile. Your credit score is a three-digit number that gives lenders an idea of your creditworthiness, which is your ability to repay the amount.

Here’s how a good credit score and report can help when applying for a personal loan.

A strong credit profile may speed up the loan approval process since lenders see it as proof of financial discipline and view you as a low-risk borrower.

A high score broadens your choices, as more lenders may be willing to offer you better terms.
Lenders may offer the best possible interest rates to borrowers with high credit, which can help reduce the overall cost.

Also read | Credit score over 800? You can secure your dream job, cheaper insurance premiums besides lower interest rates

Conditions to be aware of when availing a personal loan

Defining your loan requirement

First, think about why you need the loan and how much money you really need before you start searching for lenders. Being precise with your amount will help you avoid borrowing more than necessary and ensure your loan fits within your ability to repay.

The debt-to-income (DTI) ratio is essentially the portion of your income already going toward existing debts. Lenders prefer a lower DTI ratio, as it shows you are financially responsible and have room to take on new debt. Avoid the temptation to borrow more than you need. Just because you qualify for a higher loan amount doesn’t mean you should take it.

Also read | Why did my credit score drop despite timely payments? Understand the hidden factors

Understanding loan tenure and interest impact

The tenure of your loan affects the monthly EMI and the total interest you will pay over time. Personal loans typically offer short- to medium-term options, with a repayment period from 12 to 60 months. Longer tenures mean smaller EMIs, but it results in paying more interest. Shorter terms have higher EMIs but let you pay off the loan faster, which saves on interest.

Additional fees and hidden charges

Apart from interest, there could be additional charges such as processing fees. It’s a one-time payment deducted when your loan is disbursed. There may also be a prepayment fee if you choose to prepay your loan before the end of the tenure. While prepaying can reduce your interest burden, ensure that the prepayment charges do not outweigh the benefits. Always read the terms and conditions carefully to understand any extra costs that may come up.

Also read | How to improve your credit score without breaking the bank

The final step: Reflect on your financial commitment

Taking on a personal loan is a commitment to repaying in monthly instalments over the loan tenure. After all, a loan is a tool to meet your needs, not a reason to overburden yourself financially.

By asking yourself these questions and weighing each decision thoughtfully, you will be well-equipped to make an informed personal loan choice. With the right approach, a personal loan can be a helpful tool when used wisely, supports your goals and maintains your financial health.

The writer is SVP & Head - Direct to Consumer Business, TransUnion CIBIL. 

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.