When your Credit Score determines your Interest Rates

A credit score is a major deciding factor for banks to grant you loans and also to decide the terms and conditions on which the loans are to be given. Banks prefer borrowers with low outstanding balances, long credit history and high credit score. A good credit profile and high credit score are viewed positively by lenders. It also puts the borrowers in a position to bargain for better terms and conditions and draw loans at best available rates. On the other hand, it might get difficult to even get loans with poor credit score, leave aside the question of interest rates. Hence, it can be rightly said, “better the credit score, better the interest rates”.

Linking credit score to interest rates provides a risk premium to the lender. A higher credit score puts the banks in a comfortable position to offer you a better interest rate. The reverse is equally true. By offering high-interest rate loans to borrowers with low credit score, the banks basically cover or hedge the credit risk by earning more from such borrowers in the form of interest.

In recent times, due to increase in NPAs, the banks have become all the more cautious while lending money. The credit profile and credit score are properly scrutinized to avoid any defaults or increase in NPAs. Bank of Baroda has, in fact, become India’s first bank to implement the policy of linking interest rates on loans to credit score. The bank offers 8.35%. on home loans with customers with credit scores above 760 points. Further, the customers with a credit score in the range of 725 to 759 points are being charged 8.85% while those having credit score below 724 points are charged 9.35% on home loans.

This differential interest rate regime based upon the credit score of the customers is like rewarding customers with better credit rating for being financially disciplined. So, the customers with better scores get better interest rates, the cost of which is compensated by the those with lower credit scores, in the form of higher interest rates on loans borne by them.

A high credit score indicates that you have paid all dues in time in the past. It enhances the confidence of lenders that his money is safe and would be repaid in time which this increases your chances of getting loans at cheap interest rates. To get loans at better interest rates, one must monitor his credit profile and make efforts to maintain a good credit score.

With a good credit score, you have an access to multiple lenders for your financing needs. Loan Frame negotiates the best interest rate and loan amount for your needs. We make use of technology to help you connect to the right lender for your business loan needs.

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