Offers
Rates
V-KYC
Debit Card Related
Credit Card Related
SA Welcome Kit 
Manage Mandate(s)
Get Mini Statement
categories
Bloggers
Blog collection
Press Release
The Impact of Personal Loans on your Credit Score and Financial Health
Posted on Saturday, April 8th, 2023 | By IndusInd Bank
Personal loans are increasingly becoming popular among Indians from all walks of life. According to a recent report titled ‘Indian Retail Loans Overview’ by Andromeda & Equifax, personal loan disbursements saw a surge of 42 percent from March 2021 to March 2022.
A type of unsecured loan, a personal loan comes in handy for a variety of big expenses – a medical emergency, a vehicle purchase, home renovation, higher education, or even a wedding. Even though most people do not apply for a personal loan onlyfor the sake of building a credit score, there is a deep connection between the two. Read on to get the complete lowdown on how a personal loan can affect your credit score and larger financial health.
What Does Credit Score Mean?
A credit score is a 3-digit figure based on an analysis of a person’s credit report, indicating their creditworthiness. Akin to a grade given to your credit report, credit scores in India are computed by the following Credit Bureaus: a) Equifax b) TransUnion CIBIL c) Experian, and d) CRIF Highmark. The table below elucidates the various levels of credit score and how they are interpreted.
| More than 750 | 650-749 | 550–649 | Less than 550 |
| Very Good: Indicates responsible credit behaviour; such borrowers are typically offered the best personal loan interest rates. | Good: Indicates occasional misses or delays in credit repayments in the past; such borrowers are still seen as dependable. | Average: Signals risky credit behaviour; lenders could be reluctant to lend to such individuals. | Poor: Considered highly risky; such borrowers most likely have a history of defaulting on credit repayments and have little to no chance of obtaining a personal loan. |
Impact on your Credit Score when Applying for a Personal Loan
Just like with any other loan, applying for apersonal loan will prompt lenders to run a hard inquiry on your credit report. This could cause a minor dip in your credit score. This is because every hard inquiry shows up on your credit report, causing your score to take a slight hit.
Moreover, if you already have outstanding debt and are now acquiring new debt with a personal loan, your credit rating will go down temporarily.
But yes, if you have a long history of responsibly managing debt and making timely repayments, this impact on your credit score from a new personal loan is likely to be only negligible.
It must be borne in mind that credit bureaus take note of new financial activity. For instance, if you apply for a personal loan soon after applying for a new credit card, a hard inquiry would be run for both applications, significantly lowering your credit score.
How a Personal Loan Can Positively or Negatively Affect Your Credit Score
The table below sheds light on how a personal loan can affect your credit score – both positively and negatively.
| How a Personal Loan can Help your Credit Score | How a Personal Loan can Hurt your Credit Score |
| A personal loan helps improve your credit mix i.e. the different types of credit accounts you maintain such as loans, credit cards, & mortgages. This makes up a small percentage of your credit score. | Applying for too many loans – including a personal loan – within a short time, would prompt multiple hard inquiries on your credit report. This would hurt your credit score. |
| When you make full and timely repayments on your personal loan, it helps establish positive payment history which makes up a significant proportion of your credit score. | A personal loan that has a high interest rate & processing fee would increase your chances of missing out on or delaying payments. This would adversely affect your credit score. |
| If you are consolidating multiple loans into one personal loan, you may take advantage of the lower rate of interest to pay off your outstanding debt and raise your credit score in the long run. | If you are using a personal loan to rack up new debt instead of consolidating existing debt, any defaults would cause your credit score to drastically plummet. |
Apply for an IndusInd Bank Personal Loan
If you need additional financial support in the form of a personal loan and are looking to build your credit score and improve your financial health through one, look no further than a personal loan from IndusInd Bank.
IndusInd Bank offers affordable personal loans at attractive interest rates, low processing fees, and flexible repayment tenures – ranging from 1-4 years – enabling borrowers to repay in accordance with their comfort and convenience. Besides, you may use an IndusInd Bank personal loan for anything you like, including for debt consolidation. Best of all, the application and approval process is 100% digital and instant, ensuring a hassle-free experience. Apply Now!
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and 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.
