Credit Scores Explained: How They Impact Your Loan Applications?

In April, my friend Mehul and I both applied for a personal loan of ₹5 lakh. I got mine approved at 10.5% interest, while Mehul got it at 15.2%. This was because his CIBIL score was 648, and mine was 790. Same bank, same loan amount, but his monthly EMI turned out to be ₹1,100 more than mine.

Here’s how our loan details compare:

Your credit score is your financial reputation, just like your 12th-class board results. Whether it’s a loan, credit card, or even a home EMI, this score decides how much interest you’ll pay.

So, why not discuss how credit scores impact your loan applications in this blog? Let’s start.

1. Higher Credit Scores Lead to Better Loan Approval Chances

When I applied for my first car loan, I was confident due to my stable income. However, the bank rejected my application because my credit score was below 650. This experience taught me that a good credit score is crucial for loan approvals. Lenders view a high credit score as an indicator of financial responsibility, increasing the likelihood of loan approval.

For example, Anita is a marketing executive in Mumbai. She applied for a personal loan. Despite a decent salary of ₹60,000, her application was rejected due to a credit score of 520. After improving her score to 750 over six months, her loan was approved. 

2. Credit Scores Influence Interest Rates

My friend and I applied for similar home loans. While my interest rate was 8.5%, his was 9.5%. The only difference was our credit scores; mine was 780, his was 700. A higher credit score can secure lower interest rates, resulting in savings over time.

For example, Rahul and Neha both took ₹10 lakh personal loans. Rahul had a credit score of 760 and received an interest rate of 11%. Neha, with a score of 680, was offered 15%, resulting in higher EMIs for Neha. Let’s compare their finances with the help of the table given below:

3. Multiple Loan Inquiries Can Lower Your Credit Score

I once applied for several credit cards within a short period, thinking it would increase my chances of approval. Instead, my credit score dropped by 20 points. Each hard inquiry can slightly reduce your score, and multiple inquiries can signal financial distress to lenders. 

For example, Suresh applied for five different loans within two weeks. Each application resulted in a hard inquiry. This reduced his credit score by 25 points, so now his score his 713. It affected his eligibility for a home loan he planned to apply for later.

4. Credit Scores Affect Loan Terms and Conditions

When I had a lower credit score, the bank offered me a personal loan with a shorter tenure and higher monthly instalments (EMI). After improving my score, I became eligible for longer tenure loans with more manageable EMI payments. Credit scores influence not just approval but also the terms of the loan.

For example, Meena, with a credit score of 650, was offered a personal loan with a 2-year tenure. Tenure was short, but EMIs were out of budget. After improving her score to 750, she qualified for a 5-year tenure loan. This reduced her monthly EMI, easing her financial burden.

Conclusion

Your credit score is not just a number. It’s your financial CV. Therefore, it is your responsibility to nurture and grow it. Lenders mainly see your CIBIL score before deciding the terms for your loan. Now, do you want a higher interest rate or would you rather have your application rejected? Neither, right. 

Therefore, understand how your credit score impacts your chances of obtaining loans on favourable terms and strive to improve it. Easy!

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?