A Personal Loan not only provides the means to achieve personal milestones but also has the potential to influence your credit score. Understanding the relationship between Personal Loans and credit scores is crucial, especially when considering long-term financial health. By educating yourself on whether Personal Loans affect credit scores and taking informed actions, you can ensure that your financial journey is both successful and sustainable.
Impact of Personal Loans on your credit score
When you apply for a Personal Loan, your credit score is affected in several ways, both positively and negatively. Here’s a closer look at how a Personal Loan affects your credit score, examining this dual impact -
- Credit inquiry: When you apply for a Personal Loan, lenders perform a hard inquiry on your credit report, which may cause a temporary dip in your credit score. However, this impact is usually minor and short-lived.
- Credit mix: Adding a Personal Loan to your financial portfolio can improve your credit mix, which is a factor credit agencies consider when calculating your credit score. Having various credit types, such as revolving credit (Credit Cards) and instalment loans (like Personal Loans / Home Loans), can be beneficial.
- Debt-to-Income ratio: Taking a Personal Loan can affect your debt-to-income ratio, which is the amount of debt you have compared to your income. Managing this ratio is crucial as it influences credit decisions made by lenders.
- Payment history: Perhaps the most significant factor is how you manage the repayment of your Personal Loan. Regular, on-time payments can greatly improve your credit score, while missed or late payments can have a detrimental effect.
Key things to watch for Personal Loan application
Understanding how to manage and apply for a Personal Loan is key to maintaining and even improving your credit score. Here is what you can do -
- Use a Personal Loan Eligibility Calculator: Before applying, use tools like Axis Bank's Personal Loan Eligibility Calculator to understand how much you can borrow without compromising your financial health.
- Consider Personal Loan interest rates: Comparing Personal Loan interest rates before you apply for a Personal Loan can save you money and make repayment easier. This, in turn, positively affects your credit score.
- Monitor your credit score: Keep an eye on your credit score both before and after taking out a Personal Loan. This will help you understand the effects of your financial actions and guide you in future credit use.
Also Read - What is the minimum CIBIL Score for a Personal Loan?
Conclusion
Understanding how a Personal Loan can impact your financial standing helps you make informed decisions. Using tools like Axis Bank Personal Loan Eligibility Calculator and comparing Personal Loan interest rates are crucial steps in managing your financial future effectively.
The question of does a Personal Loan hurt your credit depends on how you manage the loan. Axis Bank offers Personal Loans up to ₹40 lakh at competitive rates starting at 10.99% p.a., with repayment terms up to 84 months. This flexibility allows for manageable repayments, which can improve your credit score if handled properly.
The answer to the question - how does a Personal Loan affect your credit score - is that there may be an initial dip due to the credit check during application. However, consistent on-time payments can enhance your credit history, showcasing your reliability as a borrower.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
