CIBIL score is one of the most critical parameters that lenders consider before approving loan applications. Irrespective of the financial product, a CIBIL score of 750 or above is preferred. With increased emphasis on this score, potential borrowers need to conduct CIBIL report checks to stay updated and evaluate their creditworthiness.
How does CIBIL score affect a loan application?
Scored on a range of 300 to 900, the CIBIL score is integral to the loan application. This 3-digit numerical rating provided by TransUnion CIBIL and other credit rating agencies represents the overall financial health.
Here are a few reasons supporting the importance of CIBIL rating for loan application approval:
- Determines creditworthiness
CIBIL score is the primary impression of creditworthiness to a lender. It implies whether a borrower would repay the loan within the tenor or not, given the rising delinquencies in the financing sector. In August 2020, NBFCs across India reported a rise of 0.49% in loan defaults. Consequently, financial institutions are cautious in disbursing loans to borrowers with a low credit score.
- Facilitates a quick loan approval
A high CIBIL score accelerates the application approval process. Since a decent score builds a sense of trust for lenders, it takes less time to process a loan application. Faster approval of loan applications leads to quick disbursals, which may help fulfil emergency financial obligations.
- Provides competitive interest rates
Before taking a loan, borrowers must check the interest rates. Among the factors that affect a loan interest rate, CIBIL is one of the most important ones. For example, someone with a CIBIL score of 800 will be eligible for competitive interest rates on the loan amount. On the other hand, someone with a low CIBIL score of 600 will have to incur heavy interest rates.
Conducting a CIBIL report check and maintaining a high score could also expedite negotiation with the lender. Verily, certain lending institutions can also agree to waive off the processing fee or pre-payment charges.
- It helps in estimating the loan amount
The amount of loan one is eligible to get hugely depends on the CIBIL score. Since a low CIBIL score depicts an unhealthy financial summary, lenders are skeptical about offering high-value loans to such individuals.
That said, it is not impossible to secure the required loan amount with a low CIBIL score. Even though a lender may approve a loan application with a low score, the interest rate would be higher. In addition, the lender may impose strict policies and lower the loan quantum.
- Securing better repayment terms
Even though loan repayment is not directly related to credit score, individuals with a higher score can negotiate and secure repayment flexibility.
Alongside knowing the points on how a credit score can affect a loan application, individuals can perform a free CIBIL score check using leading financiers like Bajaj Finserv’s website. If they have a comparatively low CIBIL score, individuals can improve it by following the pointers mentioned below.
How to improve the CIBIL score?
Here are a few ways via which you can improve your loan CIBIL score:
- Always pay outstanding dues on time as lenders view late payments negatively.
- Always be judicious not to use too much credit. Control credit utilisation ratio and keep your outstanding in check.
- It is advisable to have a healthy credit mix of both secured and unsecured loans. Secured loans comprise home loans, car loans, etc. On the other hand, unsecured loans are personal loans, credit cards, etc. Leniency towards any credit type leaves a negative impact on one’s credit profile.
- Refraining from making credit applications regularly. Since loan enquiries register as a hard query and they can reduce one’s credit score.
- Finally, supervise CIBIL report check regularly to detect any mistakes. Rectifying these issues will have a positive impact on one’s credit score.
While conducting a CIBIL report check is crucial, it is also essential for borrowers to know the factors affecting this score. One must be well-versed with this rating and then make an informed decision to avail of affordable and hassle-free borrowing.