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Getting a personal loan has become quite easy these days. Mobile apps, online banking, and instant approvals have made it a snap. However, if you repeatedly take out personal loans to meet your needs, you could lose the trust of the bank, as repeated personal loans can also damage your CIBIL. Here's how.

1. It Can Degrade Your Credit Mix
A personal loan is an unsecured loan. This means it doesn't require any collateral (such as a house, gold, etc.). This is why it is considered a bit risky for banks. Experts believe that you should avoid taking out a personal loan unless you absolutely need it. Repeated personal loans can lead to a deterioration in your credit mix, directly impacting your credit score.

What is Credit Mix?
Your credit mix is ​​determined by how many of unsecured loans and how many secured loans you've previously taken out. Both personal loans and credit cards fall into the category of unsecured loans. If you've repeatedly taken out unsecured loans, such as personal loans or credit cards, but haven't taken out many secured loans, it can worsen your credit mix.

2. Can banks consider you 'credit hungry'?
If you're repeatedly applying for personal loans, a bank or NBFC views it as 'credit hungry'. This means you have a persistent need for funds. However, if you're taking out personal loans 1-2 times and repaying them on time, it won't make much difference. However, if you take out a new personal loan every 6-8 months, it's sure to raise alarms for the bank.

How does it affect your CIBIL score?

1. Every Loan Application Lowers Your Score
As soon as you apply for a loan with a bank or finance company, a "hard inquiry" is placed on your credit report. Each hard inquiry can lower your CIBIL score by 5-10 points.

2. Impact of Credit Mix
If your credit mix deteriorates, the bank receives the message that you are short on funds and overly dependent on credit. This can make the bank doubt your ability to repay the loan, impacting your CIBIL.

3. Loan EMI and Debt-to-Income Ratio
If your net salary is ₹50,000 and you are already paying an EMI of ₹20,000, the EMI of the new personal loan will increase your debt-to-income ratio. This can lower both your score and credit limit.

4. The biggest risk of loan default
Repeatedly taking loans means the burden of multiple installments every month. Missing even one EMI can drop your credit score by 50 to 100 points.

Ways to avoid repeatedly taking personal loans
Build an emergency fund

Save 10-15% of your income every month and put it into the fund to avoid expensive loan EMIs.

Use credit cards wisely.

Take EMI options as needed, but avoid personal loans.

Keep your debt-to-income ratio low.

The total EMI should never exceed 40-50% of your income.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.