Are you thinking of applying for a personal loan in the near future? Do you want to pick the best deal without actually upsetting your credit score?
If you’re wondering what’s being discussed, here’s something for starters – when you approach a bank or a financial institution for a personal loan, a credit check will be performed, subsequent to which a decision on approving your loan will accordingly be taken. This is precisely why we are advised to refrain from managing credit in such a way that we get our credit score bent out of shape.
What is least understood is that whenever you apply for a loan and a credit check is consequently performed, your credit score takes a slight hit. Surprised? Quite unpleasant, but true.
Technically, multiple credit checks mean that clouds have reigned on the horizon. So, in order to avoid your credit score from taking a beating, you should prevent multiple credit checks from being performed on your credit profile.
If you are looking to find the best personal loan without hurting your credit score, here’s what you can do. Note that a good credit score will always get you a good interest rate on your loan.
Don’t approach too many lenders and DSAs (Direct Sales Agents)
It’s not new that every lender in the market will unfailingly promise you the best rates for your loan. Whilst you’re promised the best rates, your interest rate will, however, be dependent on your credit score, and repayment history. Other factors like your income and age are also sometimes considered.
So although you’re promised awesome rates, you don’t quite get them. Seems like a farce? It is actually.
If you’re thinking of choosing a DSA agent for your loan requirement, let’s look at something pertinent.
Approaching Direct Sales Agents (DSAs) for your loan is also a risky proposition as DSAs send your application to multiple lenders, thereby leading to multiple credit checks being performed in the process. Most customers aren’t aware of this. It’s important to note that multiple credit inquiries by various lenders is symbolic of credit-hungry behaviour, and the velocity at which inquiries are made will correspondingly affect the credit score. This clearly is an unfavourable fallout that brings down the the credit score and threatens approval of future loan applications.
Knowing this, it’s best to refrain from approaching too many lenders with the intention of getting the best interest rate for your loan application, simply because your credit score will face distress.
Do some research to familiarize yourself with available deals
If you wish to apply for a personal loan with the lowest possible interest rate, make sure you do at least a tad bit of research in order to know what lenders can best serve your interest.
As you’re already aware, the market is home to an ocean of lenders offering you loans at varied rates. It is advisable to know the lenders that are active in the market and make your choice accordingly.
Choose a lender based on your credit profile
Your existing credit profile is an overbearing parameter that influences your loan approval or rejection – precisely why the wisest thing to do is to opt for a lender based on your credit profile. Wondering what this is about? Let’s find out!
If your credit score is high, you will be eligible for low interest rate personal loans from reputed, private lenders (mostly top private banks that are active in the personal loan space). However, if you’ve had multiple instances of late payments in the past, your credit score would’ve taken a drubbing, making you potentially ineligible for loans from top private institutions.
If you’re part of the other end of the spectrum where you’ve had multiple instances of late payments, choosing a lender with easy eligibility criteria is the best decision. New-age lenders like Fintech companies offer loans to individuals with low credit scores too. Some popular Fintechs who’ve expanded their market presence quite significantly, offer loans to individuals with credit scores starting from 600.
The idea here is to choose a lender that will approve your application based on your current credit profile – this, in order to avoid a blemish on your credit report because of a credit check that saw your application being rejected by a lender.
Go for pre-approved loans if you are an existing customer with a bank
In some cases where a customer has a savings account with a particular bank for over 5 years, the bank does not resort to performing a hard credit check while processing a loan application. Based on the customer’s existing track record, a pre-approved loan offer is made, thereby not resulting in an indelible mark on the credit profile that can cause uninvited hiccups while availing future loans.
The interest rates on pre-approved loans are generally less – an aspect that is beneficial to customers who’ve had long-term relationships with their respective banks.
Also, Fintechs have adjusted their offerings to provide rates that are almost as low as rates provided by top private banks. Some offer loans starting at 11.99% p.a.
Avoid cancelling your loan after applying with a particular lender
This is mostly true if you’re taking a loan from a top institution. Note that while considering your loan application, the bank would’ve done a hard credit check, as already mentioned earlier. If you’ve been offered a particular interest rate and have agreed to it, cancelling your current loan (recently offered to you) to settle for a loan with a different lender who is offering you a much lesser rate will impact your credit score. This can jeopardize future loan applications as lenders will deduce that you can easily switch loan providers after being made an offer – not something that will help in creating a good impression.
What needn’t necessarily be said is that credit scores are mighty important as far as getting your loan application approved – mainly because personal loans are unsecured loans and your credit score is perhaps the most basic (also the most important) facet that gives banks an idea about whether or not you are worthy for a loan.
Smart borrowers care a great deal about their credit score. You can too! Jump on the bandwagon!