If you’ve ever applied for a loan and faced rejection or found yourself offered high interest rates, there’s a good chance your credit score is to blame. A credit score—a three-digit number ranging from 300 to 900—plays a crucial role in determining whether you’ll get approved for a loan and what kind of interest rate you’ll be charged.
Banks and financial institutions rely on this number to assess how risky it would be to lend you money. A good score can mean access to lower rates and faster approval, while a poor score can make borrowing difficult and expensive.
What is a Credit Score?
A credit score reflects your history of paying back borrowed money. It shows lenders how likely you are to repay a loan based on your past behavior. Scores are generally divided into three ranges:
- Good (750 and above): Easier approval, low interest rates.
- Average (650-749): May face slightly higher interest rates.
- Poor (Below 650): Loan applications often get rejected or come with high interest rates.
How Does Credit Score Affect Loan Interest Rates?
Lenders like SBI, HDFC, PNB, and ICICI Bank offer different interest rates depending on your score. Borrowers with higher scores can expect cheaper loans, while those with lower scores face higher costs.
For example:
- Good Credit Score (750+): You can secure a home loan at around 8-9% interest.
- Average/Poor Credit Score (650 or below): You may end up paying 10-13% interest, making the loan much more expensive.
Impact on Loan Eligibility
A bad credit score doesn’t just increase your loan cost—it can also limit the type of loan you’re eligible for.
- Unsecured Loans (Personal Loans, Credit Cards): With a poor credit score, you might not qualify for these. If you do, you’ll likely face high interest rates.
- Secured Loans (Home Loans, Car Loans): You may need to provide a larger down payment and will also be charged higher interest rates.
Why Your Credit Score is Low
If your credit score is low, it’s often because of missed payments, defaults, or having a high credit utilization ratio. These issues can appear on your credit report (CIBIL in India is the most commonly used), making lenders wary of offering you a loan.
Fewer Loan Options
With a low credit score, traditional banks may not approve your loan, leaving you with only high-interest options like non-banking financial companies (NBFCs) or private lenders. These institutions charge more than public sector banks, making loans even more costly for borrowers with low credit scores.
If your credit score is holding you back from getting affordable loans, it’s important to take steps to improve it by paying bills on time and keeping your credit usage low. By doing this, you can eventually qualify for better loan offers in the future.
