How High CIBIL Score Helps in Getting Low-Interest Rate Loans

Every bank or NBFC offers a different rate of interest for different types of loans. Apart from factors such as the existing relationship of the applicant with the bank, special offers for the category of the citizen, the earning pattern of the applicant, etc., the CIBIL score is the major factor that helps the lender in deciding the interest rate that it would offer to the applicant.

How is the Interest Rate for Loans Decided

Applicants having a credit score of 750 and above, may get loans at relatively lower rates of interest, and applicants having a high CIBIL score of 850 and above are offered the lowest rate of interest if other parameters are fulfilled.

Those loan applicants who have a credit score near 550, are rarely offered any loan by top banks and even if it is offered, it is offered at the highest rate of interest.

Most banks do not approve the loan application of applicants who have a CIBIL score below 650. However, there are a few lenders that provide them loans but the rate of interest offered can be as high as 30%.

Relation between CIBIL Score and the Rate of Interest

A loan comprises two units, the first unit is the principal amount and the second unit is the interest amount. The payable principal amount is the same for all applicants irrespective of their CIBIL score. However, the difference in the payable interest amount is due to the different interest rates offered by the bank to different individuals based on their CIBIL scores.

If the applicant has a high CIBIL score, his creditworthiness is high and it would be safer for the bank to lend him a loan. Having a low CIBIL score shows that the creditworthiness of the individual is very low and it would be very risky for the bank to grant a loan to such individuals. In many cases, banks also deny to grant a loan to such individuals even if the loan is a secured one.

If the bank offers a higher rate of interest, you can check your CIBIL score and detailed report and find out what mistakes you have committed in the past. If there are still outstanding bills, you can get those cleared as early as possible to improve your credit score.

Also Know: What is the fastest possible way to improve my credit score?

What is the CIBIL Score

Credit Information Bureau (India) Limited or CIBIL is India’s leading credit information company. With more than 2,400 members, the organisation is India’s biggest and most trusted organisation in the industry. The company started its operations in 2000 and was acquired in 2016 by TransUnion to become TransUnion CIBIL. CIBIL provides ratings to organisations as well as individuals. The company collects the information from various sources, analyses them, and generates a rating/score which helps lenders decide whether the applying entity should be granted a loan or not.

CIBIL collects information related to an applicant’s current and past financial history and his repaying pattern and gives a score to the person. This score varies from 300 to 900. A person having a higher credit score signifies that the person has managed his finances well enough and has a clean record of credit repayments. It also signifies that the applicant has a higher creditworthiness and there is a higher probability of him repaying the loan back in time.

As per CIBIL’s analysis, about 79% of the loans are sanctioned to people who have a CIBIL score of 750 and above. Having a higher CIBIL score not only makes it easier for the applicant to get loans easily, but he also gets the loan at a relatively lower rate of interest. Banks prefer disbursing loans to such applicants because there are very few chances of them defaulting on their loan EMI or not repaying the loan.

As applicants with higher credit scores have greater creditworthiness, they get usually lower interest rates on home loans, as well as on personal loans or car loans. Many banks offer lower interest rates to such applicants which allows them to negotiate with the lending organisation.

How does CIBIL Score Help

It is the thumb rule for banks to charge higher rates of interest for applicants having a low credit score and offer lower interest rate loans to people having higher CIBIL scores. In case you fall under a category where your loan application has been rejected due to the low CIBIL score, you should postpone your plan to take a loan at this instant as either your loan will not be sanctioned or you will have to pay the higher rate of interest on your loan.

If the bank offers a higher rate of interest, you can check your CIBIL score and detailed report and find out what mistakes you have committed in the past. If there are still outstanding bills, you can get those cleared as early as possible to improve your credit score. Once you clear all your dues, you can wait for some time and recheck your CIBIL score. This time you will get a higher CIBIL score and if it goes beyond 750, it would be very easy for you to get loans, and that too a way lower interest rates.

Also Know: What is the difference between a credit score and a CIBIL report?

How to Improve CIBIL Score

It is always advisable to apply for a loan only after you check your CIBIL score. Once you check your score, you know the rate that banks would probably offer to you when you apply for the loan. Secured loans such as car loans or home loans are offered at relatively lower interest rates whereas unsecured loans such as personal loans, education loans, etc. are sanctioned at higher rates of interest. Applicants with higher CIBIL scores get both types of loans at very low interest rates whereas applicants with lower CIBIL scores are offered loans at very high rates of interest.

• Paying off Credit Card Bills on time – If you pay off your credit card bills on time and repay all your outstanding bills, your credit score will improve
• Inaccurate Appeals – In case of any discrepancies in your credit report, you can appeal against the bureau and ask them to make corrections in your report. Wrong data can degrade your credit report. Thus, as soon as you find any discrepancy in the report, get it rectified as early as possible
• Using the Oldest Credit Card – The older your credit card, the better it is for your CIBIL score. If you have made timely payments on your credit card, then keep it active as it will give your CIBIL score the required boost
• Increase the Credit Limit of your Card – The more the credit limit, the lower will be your limit-to-usage ratio. This will help you to show that you manage your finances well and have a regulated spending pattern. It helps a lot in increasing your CIBIL score.
• The 30% Rule – Try to limit your credit card spending to 30% of your card’s limit. It shows that you do not spend much and are a person who saves his earnings. This helps a lot in increasing your credit score
• Timely Equated Monthly Instalments Payments – If you already have a loan on your vehicle or home then pay your EMIs on time. Timely payments will show that you are a disciplined borrower. This helps a lot in improving your credit score
• More credit accounts – The number of credit accounts you have or have had in your past largely determines your credit score. More the number of credit accounts in the past or at present signifies that you are successful in managing your finances and this helps in improving your credit score.

FAQs

Q. What CIBIL score gets the lowest interest rate?

Ans. There is no specific credit score required to get loans at the lowest interest rates, as defined by the lenders. However, if you maintain a high CIBIL score of 750 or above and as close to 900, then the chances of loan approval increase, and lenders offer credit facilities at low interest rates.

Q. Does a good credit score reduce interest rates?

Ans. Not always but yes, a good credit score showcases your creditworthiness and repayment capacity. A good credit score does not reduce the interest rate, but it becomes easy for lenders to offer loans at competitive interest rates to applicants with low risk or minimum chances of default.

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