Your credit score has a huge impact on the actual amount you have to pay to a bank when you take a loan. This is because it affects the interest rate on loans and credit cards, and bad credit can make it difficult to get low interest rates that can lower your financial burden.
A loan, whether it's an Axis bank personal loan, SBI home loan, or some other loan, is comprised of two components which are the interest amount and the principal amount. The latter is the exact amount that you borrow from the bank and it stays the same throughout the loan’s tenure. However, the interest amount can change based on the loan term. If the term is longer, you have to pay more amount of money, and if it's shorter, then the interest amount is also lower. Other than that, the nature of interest rate can also affect the interest amount. This is because if your interest rate is a floating interest rate, then the rate itself can increase or decrease throughout the term as per the market conditions.
A credit score helps a bank to determine the risk factor of a particular borrower. For instance, a CIBIL score can range from 300 to 900, and most banks consider a score above 750 "good". So, theoretically, individuals who have a score higher than 750 are less likely to default than those whose score is below 750. This is the reason why banks reserve the best interest rates for borrowers with high scores. On the other hand, loans for bad credit are often rejected directly without any consideration. This is highly likely if your score is below 500 which is considered "poor".
Whether you are applying for a popular personal loan like Axis bank personal loan or an auto loan like ICICI car loan, you want the lowest interest rate possible so that your EMIs are smaller and don't increase your financial liability.
There are several things that you can do to get attractive interest rates which are:
As mentioned above, having a good credit score is a must to qualify for the best interest rates. There is no way around it. In fact, if your score is below average, then you may not even qualify for loans for bad credit. In other words, you won’t get any options including both good or bad. That said, you can improve your credit score easily by:
Banks are usually more comfortable in offering loans for a shorter term as that reduces the risk. This is the reason they reserve the best interest rates for these types of loans. So, if you are comfortable with bigger EMIs, which is likely to be the case when you are repaying a loan in just 2-3 years rather than 5-6 years, then you can shorten your loan term and enjoy a better interest rate.
Roping in a co-borrower is another way of lowering the financial risk on the bank's end. In fact, it's common for home loan borrowers to take loans with co-applicants which are usually their spouses. So, you can use this method for your loan too, although it doesn’t necessarily have to be a home loan.
A secured loan is a type of loan that's guaranteed by collateral which could be a property, gold, stocks, etc. Most home loans are secured loans because they are usually more expensive than other loans. However, you can get a "secured" personal loan too. This can help you to make the lender more comfortable and lower the interest rate.
Finance experts know all kinds of methods and tactics to help people get loans even if their credit is poor. However, even they agree that good credit is important for financial strength and long-term security.