Personal loans are unsecured loans. This means you are not required to offer the lender any collateral to get a personal loan. So, when you apply for a personal loan, the lender verifies your repayment capacity by checking your credit score and monthly income. Most traditional lenders depend on this credit score as a determinant in approving your loan application.Though loan apps do not rely only on this credit score to determine your borrowing capacity, the best loan app checks your credit score before granting you an online loan.
What is a CIBIL Score?
Your credit score is the reflection of your past borrowing behavior and your current outstanding debt. This score is assigned by a recognized credit bureau.CIBIL (The CreditInformation Bureau (India) Limited) is the most popular credit bureau in India. There are three other credit bureau companies licensed by RBI. The credit score assigned by the CIBIL is often called CIBIL score.
Based on the information shared by the credit bureau, the lender is able to assess the risk associated with your loan profile. The lender may reject your loan application, if your credit score is very poor or offer you a loan at a very high interest rate. But if you have maintained a healthy credit score through regular payments and cautious borrowing then the lender might reward you with lower interest rates and other amazing loan features.
Factors that Affect Your Credit Score
Your credit score is influenced in two ways: negatively and positively. Each positive behavior, such as prompt loan repayment, closure of existing debts, repayment of a credit card bill, raises your credit score, while each negative activity, such as late payment, loan defaults, missed EMIs or missed utility bills lowers it.
We’ll go through both of these effects below to give you a better sense.
Factors that have positive influences on credit scores
- Timely repayment of loan EMIs.
- Paying the total outstanding sum, not simply the minimum amount due.
- Paying credit card balances on time.
- Low debt-to-income ratio.
Factors that have a negative influence on credit score
- Late or non-payment of loan EMIs and credit card bills.
- Having an excessive number of credit accounts, particularly unsecured ones.
- Paying only the minimal amount required on credit cards while keeping the outstanding amount due for a long time.
- Frequent credit queries.
- Using a significant portion of the credit.
Effects of CIBIL Score on Your Loan Application
As you already know, a personal loan is an unsecured loan which means your creditworthiness is one of the prime determinants that lender relies on. Here are some of the biggest effects of your CIBIL score on your loan application.
1. Getting a loan rejection
The first and biggest impact of your CIBIL score could be loan rejection. Having a poor CIBIL score makes you ineligible to apply for a loan with many reputed lenders. They will straight forward reject your loan application if your credit score does not meet their set criteria.
You can check out the best loan app if you want to avail a loan despite having a poor credit score. They have several different criteria to analyze your risk profile and do not depend only on the credit score.
2. Stuck with high interest rates
Secondly, some lenders do allow you to avail a loan even if you have a poor credit score. But a poor credit score makes you a high risk borrower. This means lenders doubt your capacity to repay the loan and they also anticipate missed payments or delayed payments on your loan account. To counter this risk, they offer you the loan at a high interest rate.
Even if you opt for an online loan, your CIBIL score matters. Though it’s not the only factor determining your loan eligibility, it still holds significance in determining your interest rate.
3. Delay in loan processing
When you have a healthy credit scores, many lenders offer you pre-approved loans. This quickens your loan processing time as they already have your credit information and know your eligibility. Thus, in case of a medical emergency or any other urgent need, having a good credit score can bring you a pre-approved loan in which the loan amount can be disbursed into your account within as short as 24 hours.
4. Reduced loan eligibility amount
Poor CIBIL score can impact your loan eligibility amount. If you have a poor credit score then the lenders would not be open to offer you a loan of higher value, this is because of the high risk associated with your profile. Most lenders lower the loan eligibility amount if they see a poor CIBIL score. Whereas, a higher credit score makes you eligible for a higher loan amount.
Your CIBIL score has a huge impact on your personal loan eligibility. From determining your loan eligibility amount to your interest rate, it can affect the most crucial parameters associated with your loan. Not to mention, it can also result in credit rejection.
Thus, whether you opt to avail a loan through the best loan app or through conventional lenders, maintaining a good CIBIL score is of utmost importance. Thankfully, there are many ways to improve your credit scoreeven if your past mistakes affected it. You can start by being regular with your EMI payments, try closing your previous debts, consolidate your debts if you have multiple ongoing loans, and maintain your credit utilization limit. Always keep checking your CIBIL score and report your credit bureau if you see a discrepancy.