First-Time Retail Loan Borrowers: Biggest Mistakes That Can Damage Your Credit Score

For an ordinary retail borrower, loans such as home loans, car loans, education loans, and other personal loans often play a crucial role in giving wings to the aspirational lifestyle they envisage. However, poor management of borrowed credit due to delays in repayment or missing out on EMIs can lead to additional charges and reduced creditworthiness.

One of the most common mistakes that first-time borrowers usually make is borrowing more than actually required. Instead of first assessing how much repayment they can manage and take a loan accordingly, borrowers usually focus on their maximum eligibility, resulting in higher than manageable equated monthly instalments (EMIs), increased interest outflow, and overall financial stress.

More often than not, first-time borrowers also tend to simultaneously apply for multiple loans without realising that every application reflects into an inquiry on their credit score, signalling financial stress and excessive credit pursuing behaviour to the lenders, which may hamper their probability of getting a loan in the future.

Many borrowers also often overlook the peripheral costs associated with loans. Says Simranjeet Singh, CEO – SME & retail business, Anand Rathi Global Finance: “One frequent error that the new-to-credit customers commit is to overlook the peripheral costs associated with the loan. A loan with a slightly lower rate, when added to the other costs, often results in a significantly high overall cost. Hence, reviewing the overall loan agreement is critical before taking the loan.”

Also, first-time borrowers often lack knowledge on the offerings of different lenders in terms of the rate of interest, loan tenure, terms of conditions, such as penal charges, prepayment and part payment charges, foreclosure charges, and so on, which often pushes the borrower into taking a high-cost debt.

However, missing out on EMIs or delaying repayment is the biggest mistake that many first-time borrowers make without realising the detrimental effect it can have on one’s credit score. “Above all of this, the most detrimental mistake that first-time borrowers make is missing or delaying the EMI payments. Timely repayment is one of the most crucial factors that influence the bureau score. Even a single missed payment negatively impacts the borrower’s credit profile and attracts penalties, making future borrowing more difficult and expensive. Consistent repayment behaviour demonstrates financial discipline and reliability to lenders,” says Singh.

In terms of the impact of retail loans on the borrower’s credit score, it is essentially a double-edged sword, as it has both positive as well as a negative impact. On the positive side, retail borrowing creates a credit history which is helpful for the new-to-credit customers. Coupled with this, timely repayments and overall financial discipline greatly improve the credit score of the borrower over time. Adequate retail borrowing with timely repayment also improves the probability of the borrower to get future funding opportunities.

“On the downside though, if the loans are not managed well and frequent delays or defaults occur, the borrower will face a significant dent on their credit profile which will deter the lenders from extending credit facilities with the view of possible delinquencies,” says Singh.

For any kind of borrower, retail loans, therefore, may prove to be a great tool to realise their financial goals provided they are utilised responsibly and managed in a controlled manner.