Home Loan: Healthy financial habits like paying your credit card bill or repaying a home loan on time are important for a good credit score. But many times, when the payment amount of a credit card is small, people often take it lightly.
They think that even if they miss the payment for a day or two, all they need to pay is an extra penalty fee of a few hundred rupees to cover it up.
But that careless attitude damages their credit score, which may cost them dearly if they approach a lender for a home loan.
Based on their credit score, a lender may offer a borrower a home loan at a much higher interest rate than the rate offered to a borrower with a better credit score and timely payments of credit card bills.
“Even a single missed credit card payment can substantially hurt your credit score. The damage would vary from one borrower to another basis the credit history. But we’ve come across instances of falls of 100+ points based on a single late payment,” says Pankaj Bansal, Chief Business Officer, BankBazaar.com.
“Late payments hurt not just in terms of score damage and penalty charges, which may be a few hundred rupees in most cases. They also hurt if you’re in the market for a big loan,” he says further.
How is credit score linked to home loans?
When you approach a lender for a home loan, it checks your credit history and Cibil score (credit score).
The Cibil score ranges between 350 and 900.
A Cibil score of 800 and above can help you get a home loan at quite a low rate.
While the same lender may offer the home loan at a higher rate to a borrower with a Cibil score between 650 and 800.
A credit score of 550 or below is considered poor and weakens your chances of getting a loan.
“Loan rates are linked to your credit score. Therefore, a low score could cause long-term financial pain due to the high interest rate caused by a low score,” says Bansal.
How a poor credit score can impact your home loan repayment amountHome loans are large, and their duration is also long.
A mere change of 1 per cent in the interest rate can increase your repayment amount considerably if the loan duration is 20 years.
E.g., if you have taken a Rs 70 lakh home loan at an interest rate of 9.5 per cent for 20 years, your monthly EMI will be Rs 65,249, the total interest you will pay against the principal amount of Rs 70 lakh will be Rs 85,59,804, and the total repayment money will be Rs 1,56,59,804.
But if the lender gives you the Rs 70 lakh home loan at an interest rate of 8.5 per cent for 20 years, your EMI will be reduced to Rs 60,748, the interest money will be Rs 75,79,430, and the total repayment will be Rs 1,45,79,430.
It means that just the difference of 1 per cent in interest rate can make you pay Rs 10,80,374 (nearly Rs 11 lakh) more.
If the difference in the interest rate is higher, the difference in the repayment amount can be much greater.
Similary, if you get the home loan at a higher interest rate because of your poor credit score after missing a credit card payment, you have to pay a large extra amount as loan repayment.
“Let’s say you were in the market for a home loan of Rs 50 lakh for 20 years. If your score is 800, you could get a rate of 8.50 per cent. That implies an EMI of Rs 43,391 and a total interest of Rs 54.13 lakh. But if your score is 700, you may be offered a rate of 10.50 per cent. Here, your EMI is Rs 49,919, and your interest is Rs 69.80 lakh. That one missed payment is now threatening to cost you nearly Rs 16 lakh,” says Bansal.
As a borrower, you always have the option to improve your credit score and get your loan refinanced at a lower interest rate.
But if refinancing gets delayed for some reason, you have no option but to repay a higher amount.
Thus, we see that credit-related payments are important.
You can damage your credit score if you miss the payment deadline.
At that moment, it may look like a small matter to you, but if approach a lender for a home loan, that missed payment can cost you lakhs in repayment amount because of a higher interest rate.
It is always good to maintain healthy financial habits and make credit payments on time.
