Finding a loan isn’t easy, and sometimes it all boils down to your credit score. Lenders and financial institutions consider your credit score while assessing your loan application. How much your loan will cost you depends on your credit score. Generally, a credit score of 700 or above is considered to be an ideal credit score when you apply for a loan. However, this is not a thumb rule that all the lenders go by.
Loans come in all kinds and sizes, from those for building or buying a home or a wedding, to those for education or buying a car. However, they can all be classified as either secured loans or unsecured loans. Secured loans, such as home loans, are secured by a valuable asset, such as a home. It means that if you don't pay as agreed, the lender might take possession of your asset and sell it to get their money back. In general, this implies the lender is dealing with less risk because they have a backup plan in place if you turn out to be an unstable borrower, and as a result, they are more willing to lend to a wider spectrum of consumers, including those who have lower credit scores.
However, with unsecured loans, often known as personal loans, you do not need to put up any kind of security. Instead, the lender will want to make a reasonable evaluation that you will adhere to. More dependable a debtor you are, the less expensive your loan will be. This means that those with bad credit scores are more likely to incur higher interest rates or be unable to obtain an unsecured loan from a traditional lender.
Now that we have classified loans as secured and unsecured, let us understand what should be the ideal credit scores for different types of loans available.
Ideal Credit Score for a Personal Loan
A personal loan is an unsecured loan that doesn’t require you to use any form of collateral to secure it. Hence, the interest rates for such loans are generally a bit higher than secured loans. Your credit score is the most essential factor that is considered to gauge your eligibility for a personal loan in India. A credit score of 700-750 is the ideal range that you should have when applying for a personal loan. If your credit score is in this range, your personal loan application is more likely to be approved faster. Also, you will be offered the best interest rates on the loan considering you have been a responsible borrower in the past.
A credit score below the mentioned range can still get you some personal loan offers, but the interest rates may be too high.
Ideal Credit Score for a Home Loan
A home loan is always a secured form of loan where your home acts as a lien against the loan you are about to borrow from a potential lender. In this case, even if your credit score is around 550, you will be able to get a home loan. The catch here is – the loan amount you may be offered will be lower than what you had applied for in the first place. This is because of the low credit score. If you apply for a home loan with a credit score of 700 or above, you can be assured of being offered the best interest rates along with easy and quick approval of your loan application.
Ideal Credit Score for a Business Loan
For a business loan, the ideal credit score should be around 600-700. However, the interest rates that you will be offered depend on your credibility as a business and borrower.
Always remember that there isn't a magic number that will instantly qualify you for a loan. This is partially due to the fact that getting a loan depends on a lot of other factors than only your credit score, and partly due to the fact that credit agencies and lenders may have different scoring algorithms.
However, it is always a fact that the higher your credit score, the greater your chances of getting a loan offer at favourable interest rates. However, if your credit score isn't good, you will probably have trouble getting a loan.
Steps like correcting any inaccuracies on your credit report, or repaying your credit card bill on time and in full can help you boost your credit score. However, the most efficient strategy to increase your credit score is to use credit responsibly and for a long time. It is difficult to predict how long it will take for your credit score to improve. Even if you are taking all of the necessary actions to boost your credit score, delays in reporting can make it take several months for it to reflect on your credit report.