Why Your CIBIL Score Holds Importance While Applying For Personal Loans

Many banks and non-banking finance companies (NBFCs) offer a quick approval process for personal loans, but only if an individual keeps a strong credit score as that is one of the most reliable tool lenders use to assess the creditworthiness of a borrower.

A personal loan is an unsecured loan and needs minimal documentation to avail. As the loan does not require any collateral, lenders take extra precautions before lending to a customer who could potentially default. One way of assessing the chances of default and ascertain the repaying capacity of the borrower is checking the CIBIL score.

As such, the CIBIL score and the credit report become good parameters to judge a person’s potential to repay loans.

Understanding The CIBIL Score

The CIBIL score is calculated by specialised credit information bureaus such as TransUnion CIBIL and Experian. These bureaus prepare a comprehensive report on the credit behaviour of a borrower.

The report includes all the past instances when the borrower made a timely repayment or missed an EMI, settled a credit card bill or closed one. It also contains lenders’ remarks on the individual’s credit repayment behaviour

The score itself ranges from 300 to 900. An individual having a score above 750 is considered good enough for banks to sanction loans and that too at competitive rates.

On the other hand, lenders would typically avoid those having a score less than 550. The CIBIL score is dynamic and keeps improving or worsening depending upon the monthly loan repayment behaviour of the borrower.

Why Lenders Use CIBIL Score

The CIBIL score is basically a report card of the borrower and depicts their creditworthiness. It works as the first impression for the lender and reflects how timely one has paid off loans, or didn’t.

Apart from using the CIBIL score to decide on granting the loan, the lenders also keep the score in mind while finalising the interest rate and repayment terms since the rate of interest varies on personal loans.

Banks charge lower interest rates for consumers with high CIBIL scores and higher interest rates for people with a poor score. A score above 750 is considered good enough by most lenders for competitive rates of interest.

Factors Affecting CIBIL Score

The loan repayment behaviour of an individual can affect the CIBIL score. While a timely payment of outstanding amount on the credit card and timely repayment of loan EMIs positively affect the credit score, 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 debts, especially unsecured ones, negatively affect the CIBIL score.

Some other factors that affect a person’s CIBIL score defaulting on repayment, adverse comments by lenders on the CIBIL report, name or address matching with other defaulters, status as a guarantor on a defaulted loan, excess borrowing, inadequate tax paying history, higher ratio of secured to non-secured loans, and length of credit history.

Multiple hard enquiries for loans or credit cards can also affect the CIBIL score negatively. So, it is important not to apply for one loan with multiple lenders, as CIBIL enquiries made by all the lenders within a short period of time will pull down the credit score.

Conclusion

The credit score and the credit report play an important role in determining the approval of personal loans at competitive interest rates. So, prospective borrowers must have sound repaying behaviour.

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%. IIFL Finance does 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, or through its app or a payment wallet.