The Impact Of Credit Scores On Loan Eligibility And Interest Rates

The credit score, commonly known as a CIBIL score, is a key factor in determining the terms and rates of interest of a loan, especially unsecured credit such as a personal loan that does not have collateral attached to it.

In the absence of a security, creditworthiness is assessed through a standardised process of looking at the credit history. Credit history is captured by the CIBIL score, named after the first Indian organisation that started the credit scoring system in the country.

The CIBIL score is practically used by all lenders as their primary lens when assessing unsecured loans.

What Is Credit Score?

The credit score, or CIBIL score, is a three-digit number that is determined by independent, private organisations by looking into a person's previous loans, including credit card debt and other borrowings, and repayment history. The range of the CIBIL score is 300 to 900. The likelihood of the loan application being approved increases as the score gets closer to 900.

While the CIBIL score is a key component of the loan application process it is not the final word for availing a loan. It is the first important detail that a good lender will look for in an application for a personal loan. If the score is below the lender’s threshold, the loan application can be rejected.

Even if a person does not have a loan but uses one or more credit cards, their score is still determined by how they have used and repaid those cards in the past. Typically, lenders will approve loans with a score of 750 or higher; the higher the score, the better. And a good CIBIL score is essential for any borrower to get the best possible deal for their loan with a reasonable interest rate.

However, the silver line in the case of a low credit score, is that the CIBIL score is dynamic and not a static figure. This means that by adopting good practices one can gradually raise their credit score over a period of time for future loans.

Factors That Affect A CIBIL score

As the CIBIL score is dynamic, there are a number of variables that can influence the score.

For instance, the CIBIL score will be lower if the borrower has a history of missed payments for loans taken out with a credit card or any equated monthly installments (EMI). Given this unreliable behaviour, a lender might see this as a risky proposition.

To avoid such a situation, a borrower can improve the credit score by ensuring the EMIs are paid on time.

It is also important that one does not become overly indebted, as having a lot of unpaid debt lowers one's credit score, especially for unsecured loans.

Additionally, borrowers must avoid submitting multiple loan applications, as this may indicate a strong desire to borrow on their part.

How Does The CIBIL Score Impact Interest Rates?

The higher the CIBIL score, the better are the chances that the borrower will get the loan at the best possible interest rate in the market.

A borrower with a CIBIL score of 750 or higher can obtain a loan from any reputable lender as long as all other eligibility requirements are met and the paperwork is in order.

Other requirements include proof of income, age, citizenship and Know-Your-Customer (KYC) details, address proof, bank details, details of employment, and salary details.

Even though a borrower who has a CIBIL score of less than 750 may be qualified for a personal loan, they may have to pay a higher interest rate than someone with a higher CIBIL score.

Additionally, they can be subject to more scrutiny with regard to their credit history, past defaults, and other loans they have taken out.

Conclusion

The basic method used by all lenders to determine a borrower's ability to repay and the likelihood of doing so on time is their credit score, also known as their CIBIL score. When it comes to unsecured or collateral-free loans, this becomes crucial for both lenders and borrowers since the score is the main criterion to determine the borrower's ability to repay the loan.

This figure is dynamic and shifts in either way over time. Therefore, a borrower might come up with a plan to make improvements in the future to win over lenders.

A score of more than 750 usually makes it easier to avail a personal loan at a low-interest rate. A lower score may not necessarily lead to rejection but can make the process difficult.

Top NBFCs like IIFL Finance provide easy loan approvals with a hassle-free process. IIFL Finance also offers competitive interest rates and flexible repayment terms that make it easier for the borrowers to clear their debt burden with ease.