How Does Your Credit Score Affect Your Home Loan Interest Rate_Banner_WC
How Does Your Credit Score Affect Your Home Loan Interest Rate_WC
The affordability of any Home Loan depends on several factors, the most important of which is Home Loan interest rates. Lenders take a risk by lending you their money and they make up for this risk by levying an interest rate on the borrowed amount. Lenders decide the interest rate to be offered to a borrower based on the risk involved in lending them money and the lender calculates this risk after looking at the borrower's credit score. Let us know about credit scores, particularly CIBIL scores and how they matter to your Home Loan interest rate.
What is Credit Score or CIBIL Rating?
Credit score is a three-digit number ranging between 300 and 900 that depicts an individual's creditworthiness. The credit score of an individual is calculated after considering several factors, such as the borrower's past repayment history, current debt situation, income profile, credit utilization ratio, etc. These factors combined tell a lender whether a borrower can be trusted with timely repayment of loan EMIs.
The higher an individual's credit score, the better their chances of getting a loan on favourable terms and conditions. In other words, individuals whose credit score is close to 900 gets the best Home Loan deals.
Does an Individual's Credit Score Affect the Home Loan Interest Rates They Get?
Yes, the Home Loan interest rates that an individual gets offered very largely depends on their CIBIL score. When an individual's credit score is excellent, i.e. between 750 and 900, they get offered the best Home Loan Interest Rates because such a credit score shows high creditworthiness and high repayment capacity. Further, borrowers with a high credit score also have higher negotiating power since all lenders want such borrowers as their clients, they can negotiate for better loan terms and conditions along with lower interest rates.
If a borrower's credit score is between 650 and 750, they will be offered a loan, but this loan will be offered at higher interest rates since this is considered an average credit score with some chances of default. If a borrower's credit score is between 600 and 650, lenders may offer them a loan, but it will be at high interest rates. Further, the lender will ask the borrower to either add a co-applicant or a guarantor to minimize chances of default. Lastly, if a borrower's credit score is below 600, no lender will give them a loan. If they do, the terms and conditions of the loan will be highly unfavourable.
The good thing is that the credit score is not absolute. By practicing proper financial discipline, borrowers can make their credit score look better. However, bettering your credit report takes time. So, be ready to stay committed and on the right track for at least a few months. Let us now look at what one can do to improve their credit score and get a Home Loan at low interest rates.
How To Improve Your Credit Score To Get Loans At Low Interest Rate?
Here are a few things you can do to improve your credit score.
The first thing you must do to improve your credit score is start paying all your bills on time. This includes your loan EMIs and credit card bills. Late payments reflect badly on an individual's credit standing. Therefore, set up reminders before all your payment due dates and make sure you are never late in clearing your EMIs.
People Also Read: How to Calculate Home Loan EMIs
Do not let your credit utilization ratio go above 30%. Credit Utilization ratio is the ratio of the credit available to the credit used. Ideally, borrowers should never use the entire amount available to them. Instead, they should try and keep their credit utilization ratio as low as possible.
If your credit is low, do not apply for a loan or a credit card for at least a few months. Too many credit queries depict an individual as credit hungry and lenders do not want to lend money to such individuals.
Yet another thing that individuals with low credit score can do to enhance their credit rating is keep a mix of credit in their credit profile. Credit or loans are of two types: secured and unsecured loans. Secured loans are backed by collateral; unsecured loans do not involve any security. Having both these types of loans convinces lender that you can handle all the different types of loans.
People Also Read: Types of Loans Available in India
Lastly, keep a check on your credit report. Sometimes, an individual's credit rating goes down due to wrong information supplied by lenders and financial institutions to lenders. So, check your CIBIL report from time to time and if you see any errors, report them immediately. Rectifying errors takes time. Therefore, errors must be reported immediately.
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