A personal or instant loan is a very common thing nowadays because people are using personal loans for several purposes. It can be for funding higher education, medical emergencies, and lots of other things. The lender of personal loans allows borrowers to repay the loan based on a flexible repayment term. It does not affect the borrower’s financial situation. Besides, a personal loan is also a collateral free loan.
These days, it is very easy to avail of a personal loan app that is associated with banks, financial institutions, etc. But before availing of the benefits, the borrower must learn that some of those lenders can check the credit score of the borrower. The credit score denotes how likely the borrower is to repay the loan amount along with the minimal interest rate.
What is the credit score?
A credit score is a number within the range of 300 to 900 that reflects your repayment capability. With the help of the credit score, a lender will understand how you can repay the loan amount within which time. You can consider it an index of all financial activities you have gone through.
Factors affecting the credit score associated with a personal loan
Credit score depends on a lot of factors that define whether you will be eligible or not for applying for a personal loan from loan apps like Nira. You can also make use of a personal loan to build your credit rating in a few ways as mentioned below.
- Debt consolidation loan
The name says it all. The personal loan that is used to consolidate debt is known as a debt consolidation loan. In case you have a few credit cards with higher interest rates, you can use this loan. Consolidating these debts will enable you to borrow money so that you can pay off those credit card bills within a monthly interval. Though it is helpful only if you can avail of the new loan at a very lower interest rate. Otherwise, you may face more payments for the new loan amount.
- Credit builder loan
Credit builder loan enables you to pay within a predefined period. In this case, you are not able to access the fund until your loan is paid completely. But when the loan amount is received by you, you can use it however you want to use it. This kind of loan is not for everyone. Only those who have bad or no credit can go for this option.
Why does a personal loan can help in credit building?
The credit score is an index that symbolizes whether you are capable or not for repaying the loan amount. Also, it indicates the level of your financial well-being. Whenever you will apply for a personal loan, the lender will go through the details of your job history, education details, previous loan history, etc to understand the credit details.
A personal loan from mobile apps like Kredit bee is considered to affect your credit score. But if you have enough ability to repay the loan amount on time, it will have a positive impact on your credit score.
Are there any other ways to build a good credit score?
There are several ways that can build a good credit score for your financial well-being.
- Always check your credit report. By reviewing the report, you can identify whether there is any error or not. In case you can spot any error, you have to correct that as soon as possible. The credit score will be dependent on all information on the credit report. So make it as perfect as possible.
- Always put a stop to your credit utilization. You can do that simply by making your loan repayment on time.
- A personal loan can be a different type of credit to your credit report. It has a different level of credit boosting capability. Apart from this, a good mix of credit cards, loans, debts, etc can also increase the credit score effectively.
- You may face an inquiry for loan approval. Loan inquiries are of two types: hard inquiry and soft inquiry. A soft inquiry is done by you when you review your own credit. It does not have any worse effect on your credit score. On the other hand, hard inquiry is done by lenders when you will apply for a loan. Frequent hard inquiries can affect your credit score because the lender will consider that you are facing financial issues. So, try to avoid hard inquiries.
Now you have understood what is the effect of a personal loan on your credit score and how it can boost it either way. In case you need to apply for a personal loan, make sure to go for the most reliable institution. Also, these days, a lot of online loan app offer the facility of online personal loans. These are usually hassle-free and paperless personal loan facilities that anyone can go for.