There are both positive and negative ways that a personal loan may impact your credit score. Getting a personal loan doesn’t negatively impact your credit score. However, in the near run, it can lower your credit score overall. So, it can make it harder for you to get new credit until you pay back the existing one. However, timely repayment of a personal loan should improve your credit score. Let’s find out how you a personal loan can boost your CIBIL Score 

Advantages of Taking Personal Loans to Improve CIBIL Score

Availing personal loans can help you to increase your CIBIL or credit score in the following ways.

Clear existing high-interest debts:Your interest on the outstanding loan will be high if you have not paid your prior loan dues. You can pay off your obligations with a personal loan that has a reduced interest rate. This shall reduce your financial load and raise your credit score.

Consolidation of debts:You may pay off all your bills with a single personal loan. This will guarantee a systematic repayment plan through the personal loan’s interest-bearing installments. This lowers the interest rate you pay on your loans. Even if you have prior credit obligations or unpaid loans, paying your personal loan on time can ultimately raise your credit score.

Things to Know While Availing Personal Loans to Improve Credit Score

You should be aware of a few things before you apply for a loan to enhance your credit score.

Do not make multiple personal loan applications: You should pick a lender offering a loan that fits your budget. However, you should be sure that you will be eligible to get the loan. Several personal loan rejections will lower your credit score and decrease your chances of ever receiving a loan. 

Choose a suitable loan amount: Since paying off your debts is your main goal, pick a loan amount that you can readily repay with installments. Use an EMI calculator to see how much you would need to pay in order to have a thorough understanding of the amount.

Calculate the EMI to NMI ratio: Make sure the EMI amount you’ve determined doesn’t exceed 40–50% of your net monthly income (NMI).

Avoid foreclosure: Make sure you pay your loan on time for the entire duration if you want to raise your credit score. This will guarantee that your credit history is lengthier.

Pick the lender carefully: Compare the terms and conditions offered by various financial lenders for personal loans. Pick a reputable lender that offers reduced interest rates on personal loans.

How the credit score is decided: The following are a few elements that determine your credit score. 750 is a decent credit score and 900 is great. Anything below 600 is considered poor.

The tenure of the loans: Also taken into account is the length of your loan. Your chances of getting a good credit score increase with the length of tenure during which you have made regular repayments.

Your total debt amount: Additionally, the total amount of your credit card debt and other obligations has a direct impact on your credit score. Your credit score will suffer if you have a large amount of unpaid debt.

Type of loan: Defaulting on your house or personal loan frequently, will affect your personal loan more than a few months’ of credit card payments. You should know what can negatively affect CIBIL score more.

Existing loans: You should also take into account how well you’ve paid back your present loan.

Using Personal Loan to your Advantage

You can use a personal smartly to boost your CIBIL score. The following are a few ways to do it.

• The best use of the funds is to settle any outstanding credit card debt. To maintain your credit, it is best to keep your credit cards after you have paid them off rather than cancelling them.

• You might be able to get your loan refinanced at a significantly reduced interest rate. For this, you have to keep up timely payments for the next six months to a year.

• Additionally, a personal loan raises your ratio of accessible credit to debit. It is often known as the “utilisation ratio,” accounts for 30% of your credit score.

• A personal loan can assist in improving your credit score and helping you build a solid credit mix.

• Due to the option of shorter loan terms, personal loans might also assist you in paying off debt more quickly.

Conclusion

Having a high CIBIL score becomes crucial when applying for loans. However, you can also take a personal loan to improve your CIBIL score. You can clear the existing debt or consolidate them. This reduces your debt, thereby increasing your credit score. Since personal loans have shorter tenures, you can repay debt more quickly. This again enhances your CIBIL score. So, if you’re on a low CIBIL score, consider taking a personal loan. Nowadays, you can get it online from a personal loan app. Renowned firms like Fibe are offering personal loans at affordable interest rates. In addition, the loan application process is quite easy and convenient.