Will Personal Loan Hurt Your Credit Score

Will Personal Loan Hurt Your Credit Score?

A personal loan is a form of debt defined as any amount of money borrowed for personal purposes. In Singapore, such loans are usually secured from a bank, a credit union, non-banking financial companies (NBFC) or licensed money lenders in Singapore, the interest rates for which are predefined. Personal loans are taken by individuals for many different reasons – to consolidate debt, finance home renovation expenses, fund one’s education and so forth. Repaying this type of debt is usually including an interesting value. In other words, personal loans are a modality of instalment debt that allows an individual to access a lump sum of funding for personal expenditures. They differ from other instalment loans since the exact purpose of the loan is not specified. Given below are some legitimate reasons due to which people take personal loans:

  • To pay their hospital and medical bills
  • Consolidation of debt
  • Funding wedding expenses
  • Financing vacations
  • Paying for home repair or renovations
  • Sudden expenses which have not been anticipated

Benefits of a personal loan

Illustrated below are some benefits of taking a personal loan:

  • Loans are an effective way to create cash flow, which may be required if the candidate wishes to start a venture, pay off medical expenses, remit school fees, etc.
  • Business owners also take out loans if they require finances to facilitate their business’s growth trajectory.
  • Loans grant a sense of flexibility to an individual or venture’s capital structure. The loan duration, payment rate, and principal value can all be pre-decided when the loan is taken. An individual can compare loan terms being offered across various banks and financing platforms to arrive at the best fit.

Personal loans come with a fixed date of repayment, a fixed rate of interest, etc. Like all other debt financing modalities, the accessibility to personal loans also depends on a candidate’s creditworthiness. In the next section, we shall understand more regarding creditworthiness and its role in sanctioning a personal loan.

What is a credit score?

A credit score is primarily denoted as a number lying between the ranges 300-850. The score is meant to give lending institutes an idea of how likely the candidate is to repay the loan within the stipulated period. The higher the borrower scores on the given range, the better he looks to lenders. The credit score in question is calculated based on an individual’s credit history, which includes the total number of open accounts they have, the level of debt they are operating at, previous records regarding loan repayment, and many other factors. Given below is a comprehensive list of how potential lenders view each credit score:

  • 800-850: Excellent credit history has completed all repayments on time.
  • 740-799: Very good. Stable, dependable borrower.
  • 670-739: Good. However, there remains room for improvement.
  • 580-699: Fair. Quite a large scope for improvement. Raises doubts regarding repayment.
  • 300-579: Poor score. Highly unlikely that they shall keep their repayment commitments.

An individual’s credit score is useful for many reasons, including the likelihood of loans getting sanctioned. The credit score is considered in smartphone purchases (especially EMI), cable service connections, utilities, apartment rent formalities, and so forth. Notably, creditworthiness is a significant consideration that banks look at when issuing credit cards or credit lines.

How does a personal loan affect your credit score?

Personal loans can certainly raise your credit score, but only if the loan in question is repaid within the stipulated time duration. In the short term, it may have a slightly negative impact only because having a loan running makes it more difficult to get another loan approved. However, on the other hand, paying off a personal loan within the right time frame positively impacts your overall credit score. Similarly, it may be challenging in the short run to get a credit card approved while you are in the process of paying another loan off. The main reason why applying for a loan affects your credit score, therefore, is because your overall outstanding debt has increased, and credit rating agencies take a special interest in all your new financial activities. However, it is worth noting that your credit history for the last couple of years certainly has a larger weightage in your credit score calculation than the latest loan you have taken.

Personal Loans in Singapore

Like in most international markets, the simplest way to ensure that new personal loans in Singapore do not adversely affect your credit score is by making your instalment payments in a uniform and timely manner. This will ensure that the debt has a favourable impact on your creditworthiness. It is a cyclical process – take a new loan and pay it off in time; this ensures that the ease with which you can take the next loan increases manifold, and so on.

Personal loans are a very important financial tool since they allow financial access for many different ventures. We would probably not have been able to fund on our own accord. Personal loans allow the people of Singapore greater financial freedom. Of course, these loans are riskier than equity since they fall under the ambit of borrowed funding, but that is also why the cost of these funds, that is, the interest rate, tends to be lower than the case of equity. Overall, it is important for each individual to carefully weigh the pros and cons of personal loans and compare personal loan terms across various financial institutes before making the final decision. It is also imperative to maintain a stable credit score since this is an imperative contributing factor to the sanctioning loan process. A good credit score is of extreme value to every individual since it opens up a larger range of financial tools accessible to them.