Why a Good Credit Score is Important for Loan Application?

Credit history plays a vital role in the approval or rejection of your loan application, whether you are planning to buy property, car or any other vehicle. The following article talks about the important role played by credit report in your loan approval process. Read more to know…

When a person plans to buy property, it becomes imperative to arrange for finances before finalizing on anything else. This is the time when the need to maintain a good credit score and credit history arises.

In today’s economy, it becomes challenging for a person to get loan approvals easily. Since most of the money lenders and financial institutions follow a strict process of verifying the loan application forms, a good credit report becomes the most important requirement to get your loan approved.

What is a Credit Score and Why You Need it?

Credit history indicates the credit and financial health of a person willing to take a loan. Similarly, credit score is something, which is derived from credit history of the person and ranges from 300 points to 900 points and determines your credit worthiness. These are the important tools that allow the lender to verify your delayed payments and default transactions. It also tells the lender about your repayment behaviors, credit card dues and pay back loans.

The credit score is usually calculated by software created by FICO (Fair Isaac Corporation). The important parameters that were considered at the time of calculating the respective score include types of credit used, total amount owed, payment history, new credits, delinquent accounts, negative credit record, and length of your credit history. The higher the credit score, the more are the chances of getting your loan approved at a desired rate of interest. As a matter of fact, 90 per cent of the new loan applications are now approved for a credit score of more than 700.

A credit report is maintained by credit agencies like CIBIL TransUnion. Before applying for a home loan, it is crucial to know your score to know the chances of your loan approval.

Loan Approval Process

To understand the importance and role of credit score in your loan approval, it is imperative to take a look at the complete loan approval process:

Role of Credit Score in Loan Approval

The above loan approval process clearly indicates the crucial role played by credit score. The several steps in a loan approval process include the submission of filled loan form to the bank that checks it for credit history of the applicant with CIBIL. The candidate meets the eligibility criteria of credit score, the loan is sent for document verification, else it is rejected. If the required documents such as income details, copy of tax file returns, employment details, address proof, and information on the source of down payment get successfully verified, the loan application is approved; otherwise the form is rejected.

The applicants whose report show high scores can even enjoy better interest rates and loan terms. An approved loan application with a comparatively lower score usually gets a slightly higher rate of interest and loan repayment terms.

So, a high credit score and a healthy credit report are a tool to fast-track the approval process for your loan.

Author's Bio

Swati Srivastava is an avid writer whose articles and blog posts covers a wide range of topics on personal finance, investment tips and marketing strategies. Currently sharing her insight on real estate topics, the above article discusses the importance of credit score in the loan approval process.