The Role Of CIBIL Score In Personal Loan

With most lenders offering instant or quick approval for personal loans, it is important for an individual to keep a strong credit score as that is the most reliable tool used to assess the creditworthiness of a borrower.

Personal loans are offered by banks and other financial institutions at interest rates higher than most secured loans, and largely depending on the creditworthiness and the repaying capacity of the borrowers.

Hence, it becomes important for anyone applying for a personal loan to have a strong credit profile.

Why Personal Loan

A personal loan is offered with minimal documentation and no end-use restrictions. It can be a viable option in a variety of circumstances, such as vacation, paying off debt, medical expenses, wedding expenses, and buying consumer goods. Some lenders may ask the purpose but most would not ask a borrower who has a sound repaying capacity.

What Is A CIBIL Score?

CIBIL, or TransUnion CIBIL as it is known now, is a credit information bureau that maintains the credit records of an individual who has borrowed in the past. The CIBIL score is a three-digit number and is a report card of the borrower’s creditworthiness. Other credit bureaus such as Experian and Equifax also provide a similar credit score.

CIBIL and other agencies get their information from their members. All lenders collectively share information of all borrowers and maintain a database, complete with credit scores, to protect themselves from potentially lending to defaulters. This is important also because personal loans are unsecured loans and don’t require any collateral.

A higher score improves the probability of lenders approving the loan. Also, since there is no fixed rate of interest for personal loans, the chances of lenders approving lower rates increases with a higher score.

CIBIL and other credit information bureaus, apart from giving rating on borrowers through the score, also prepare a comprehensive report on the creditworthiness of a borrower. The report keeps track of all the past instances when the borrower made a timely repayment or missed paying an EMI, settled a huge credit card bill for a smaller amount or closed one. It also contains remarks by the banks of the credit repayment behaviour of the individual.

As such, it becomes a good parameter for lenders to judge a person’s potential to repay loans.

How Good A CIBIL Score Should Be?

The CIBIL score ranges from 300 to 900. A score above 750 is considered well enough for banks to offer loans and at affordable rates. On other hand, lenders would typically avoid those borrowers who have their score less than 550.

The CIBIL score is a dynamic rating and keeps improving or deteriorating with monthly credit repayment behaviour of the borrower. Those with lower credit scores must work on their repayment pattern to avail affordable loans.

Factors Affecting CIBIL Score

Timely payment of outstanding amounts and not just the minimum due on credit card and timely payment of loan EMIs positively affect the credit score. On the other hand, non-payment and late payment of credit card bills and loan EMIs, consistent use of over 75% credit limit on credit cards and having too many credits and unsecured loans negatively affect the CIBIL score.

Defaulting on payment, adverse comments by lenders on the CIBIL report, name or address matching with defaulters, status as a guarantor on a defaulted loan, excess borrowing, over-leveraging, inadequate tax paying history, higher ratio of secured to non-secured loans, length of credit history and frequent hard enquiry on credit report are some other factors that affect a person’s CIBIL score.

Factors Affecting Personal Loan Approval And Interest Rates

Apart from the credit score, a borrower’s monthly income, location, age, work experience, and current liability such as other existing loans play a crucial role for banks in determining the interest rates for personal loans.

Lenders not only use the CIBIL score to decide whether to approve a loan in the first place but also to determine the rate of interest. Banks charge cheaper interest rates for consumers with a high CIBIL score and higher interest rates for people with a low or poor CIBIL score.

Conclusion

As the credit score and the credit report play an important role in determining the approval of personal loans at affordable rate, an individual must keep his repaying behaviour sound.

It is also important for an individual to opt for lenders that offer personal loans at affordable rates. At IIFL Finance, the interest rates on personal loans start from as low as 11.75% and do not have hidden charges.

Personal loans create a financial obligation on the borrower for its repayment within the loan tenure. Hence, it is important to have more than one means to repay the EMIs. Apart from the monthly debit from the account, IIFL Finance offers the borrowers options to repay the loan EMI online, through its own app or any third-party payment app.