How Credit Score Affects Your Loan Interest Rates

The past decade has witnessed how a credit score has taken on the role of being nothing less than a crucial financial asset in everyone’s life.

From being one of the most important eligibility criteria for the approval of loans and credit cards, to even being part of employee background checks by organizations in certain industries, the horizon of the role of the credit score has widened.

And that’s not all. Many banks and other financial institutions have also given another huge role to credit rating i.e. setting interest rates on loans based on the credit score.

So not only does your credit score impact your chances of loan approval, but your loan interest rates as well!

Understanding risk-based pricing

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Read also : Why it’s important for millennials to check their credit report every month

Simply put, lenders have started to practice an approach called risk-based pricing.

Under this, applicants with good credit scores are offered lower loan interest rates as a “reward” for being disciplined with their past credit card bill and EMI repayments. loan. On the other hand, applicants with low or no credit scores are offered relatively higher interest rates, as they tend to be at greater risk of default or irregularities in loan repayment. .

But why impose higher rates on those with low credit scores? This is because those with low credit scores clearly indicate a lack of discipline in credit repayments, which in itself increases the associated credit risk for the lender.

And those who don’t, i.e. zero credit score, are the “new credit applicants” who haven’t yet taken out a loan or don’t have a credit card yet, which implies that they have no credit history to show a repayment history, the lack of which again poses a higher credit risk.

How Credit Score Affects Your Loan Interest Rates
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What about those who are already repaying loans?

How Credit Score Affects Your Loan Interest Rates
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Not only is the practice of credit risk pricing a reward for new credit disciplined applicants, it is also beneficial for existing borrowers home loans, personal loans, car loans, etc., who maintain a disciplined record of credit repayment. Existing borrowers with good credit ratings are often offered lower interest rates by other lenders in the form of balance transfer offers.

In this way, existing credit-disciplined borrowers can further reduce their loan interest rates applicable to the outstanding loan amount.

Additionally, those with good credit ratings are also more likely to get pre-approved loan offers, given their disciplined repayment record, which reduces the credit risk of irregularities or default. payment.

So. All in all, whether you are an existing borrower or a potential loan applicant, remember that credit score can be your best friend in securing the best loan deals. at low interest rates!

Read also : Why Your Credit Score May Drop Despite Timely Payments!

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