Does Applying For A Loan Affect One’s CIBIL Score?
Constantly applying for loans counts as hard enquiry, which brings down your credit score. Know how applying for a loan affects your credit score here!
When a lender receives a loan application, it assesses the likelihood of the money being returned in full along with interest payments and other charges. There are two ways of doing this, based on the type of loan being requested.For a secured loan, the borrower is asked to furnish a collateral with a pledge. This could be an asset, physical or financial, that the borrower owns. In some cases, like a housing loan or an auto loan, the asset being purchased itself is mortgaged or hypothecated in favour of the lender. This provides an assurance to the lender that the money will be returned. In the case of a default, the lender can invoke the pledge and take possession of the asset and thereafter sell it to recover the money lent.
But for an unsecured loan like a personal loan or a small business loan, lenders assess the loan application basis the creditworthiness of the borrower or the business owner.
CIBIL ScoreOne’s creditworthiness is represented by his or her credit score, or what is better known as CIBIL score after the acronym of the first organisation that started a credit information bureau in the country. Even though the firm’s name has now changed to TransUnion CIBIL, it continues to be synonymous with credit scores in the country.
The score is captured as a three-digit number that lies in the range of 300-900. A person with a higher score that is close to 900 is considered highly creditworthy and those with a low score are considered risky.
What Affects CIBIL ScoreThe score is based on one’s credit history, especially the last 36 months. It captures aspects like outstanding and past loans availed, repayment track record and usage of credit cards, among other factors.
• Loans:If one has one or more loans outstanding, it affects the surplus from one’s monthly income and this affects the score. If one has multiple loans concurrently it pushes the score downwards. The type of loans availed is also a factor as lenders like to see a mix of secured and unsecured loans as against only uncollateralized loans.
• Repayments:When a loan is availed it has to be repaid in full along with all interest and other dues. This is done via equated monthly instalments, or EMIs. If a person misses an EMI it gets counted as a negative in the credit report. This tends to affect the score again on the downward side.
• Credit Utilisation:One’s credit utilisation is also weighed by the lenders. This is not just limited to actual loans but also covers credit card usage. Therefore, if a person has multiple credit cards and has maxed out or spent money covering almost the entire sum on one or all such cards it is also seen as a negative.
• Query:Another aspect of a CIBIL score and one’s credit history is loan query. If a person has multiple queries for loans, it gets captured in the credit report. It shows a person is desperate for a loan and has been shopping around to get approval. While one lender may not have a detailed information on why another lender decided for or against advancing money, multiple queries may be taken as a signal that the loan applicant likely got rejected by one or other peers. This again gets counted as a negative and pushes down the CIBIL score.
ConclusionThe CIBIL score is an important aspect of loan underwiring or loan approval and disbursal by lenders. The score is largely dependent on outstanding loans and repayment history of current and past loans.
The score also captures other aspects such as loan queries. Multiple queries lead lenders to pull out credit information and all gets counted as a ‘hard query’. This depicts a person as credit hungry and affects the CIBIL score negatively, even though it has less weightage than other factors in the overall score.IIFL Finance, one of the biggest and fastest-growing NBFCs in the country, offers a suite of loan products—gold loans, personal loans, business loans and even secured loans against assets such as physical or financial property via a transparent and hassle-free digital process. IIFL Finance also provides loans with the most competitive interest rates to borrowers with high CIBIL scores.