While applying for Personal Loans or any other loan, a key parameter that lenders and financial institutions look for is the credit score, also known as the CIBIL score.
Named after India’s first Credit Information Company, TransUnion CIBIL Limited, the CIBIL score is a paramount index used by all lenders to assess the Personal Loan interest rate granted to an individual, based upon their creditworthiness.
It is the first thing that lending institutions look at while considering a loan application. Only after a borrower meets the corresponding lenders’ internal credit policy criteria, their loan eligibility documents are moved to the next step of verification
What is a Personal Loan?
A Personal Loan is a loan that anyone can borrow to meet a spate of short-term and long-term financial requirements, like debt consolidation or wedding planning. Based on the applicant’s eligibility, the lenders provide fast approval on Personal Loans.
It is an unsecured loan that does not require borrowers to pledge any collateral or securities against it. The Personal Loan interest rates are very competitive. The rates are also lower than that of credit cards.
Due to the absence of collateral, such loans are given out based largely upon an applicant’s credit score as well as their entire history of past debt repayments.
Understanding Credit Score or CIBIL Score
- A credit score is essentially the summary of an individual’s credit history.
- It is a three-digit number derived using an individual’s details, found in the Credit Information Report (CIR) collected from financial institutions that provide all the information about their loans and credit card payment history.
- The CIBIL score value ranges between 300 to 900, with most lenders considering at least 750 points to determine an individual’s eligibility for a loan application.
- The more score an individual has towards the upper ceiling of 900, the more the chances of getting their loans approved sooner.
- Please note that as much as 90% of loans get granted for individuals having more than 750 CIBIL scores.
Why is it Integral to Have a Good CIBIL Score?
As mentioned earlier, a good cibil score is the first thing a financial institution notices while considering your loan application. However, that is not the only reason to maintain a CIBIL score nearer to 900 or at least above 750 points.
With higher CIBIL scores, you get better chances and lower rates of interest options for the applied loan, primarily in the case of unsecured credit like a Personal Loan.
A higher CIBIL score depicts good creditworthiness of a borrower, meaning it is safer to lend them money as they are capable of managing their finances and have a trustworthy history of repaying their debts, EMIs and credit card payments on time.
Those with high CIBIL scores can enjoy low-interest rates and get instant approvals on loan applications. On the contrary, those with a low credit score get higher loan interest rates.
How to Improve Your CIBIL Score?
Here are some ways which can help you boost your credit score to get loans approved with ease and at favourable interest rates.
- In case of outstanding debt in your portfolio, make sure to pay the evaluated Equated Monthly Instalments (EMIs) on time each time, as they significantly affect your CIBIL score. Also, a history of late EMI payments mars your credit report.
- If you have applied for multiple loans or hold several due card payments, pay them and wait for some time to improve your CIBIL score.
- Financial institutions look at a parameter called debt-to-income (DTI) ratio, before processing your loan request. If this index shows that your loan position is already overstretched, lenders could turn down your application. Maintain your DTI ratio below 40%.
- It is a highly advisable suggestion to make use of not more than 15-30% of one’s credit limit, as using your credit card to max limits could hurt your credit position.
- You can contact the respective card issuing organisations for increasing your credit card limit so you can use your card and not near the maximum available limit, boosting your credit score.
It is paramount to maintain a healthy CIBIL score of at least 750 and strive towards increasing this number to as close to 900 as possible, as it brings with it multiple benefits, including quick approval of loans as well as lower interest rates.