Personal loans have emerged as a popular option for borrowers due to their easy application process, fast processing and quick disbursal. While these loans are flexible as there are virtually no restrictions on the purpose for which you can use a personal loan, from the lender’s perspective these are quite risky. Personal loans are unsecured in nature i.e. they are not backed by any collateral, unlike a home loan or a car loan. Hence lenders pay close attention to an applicant’s credit score when evaluating personal loan applications. As TransUnion Credit Information Bureau of (India) Limited or TransUnion CIBIL is the most popular credit score provider in India, having a good CIBIL score for personal loan application approval has become a necessity these days.
How important is credit score for personal loan approval?
Your credit score plays a major role in the personal loan approval process. Higher your credit score (typically 750 and higher i.e. closer to 900), higher will be your chances of getting approved for a personal loan. While having a low credit score does not automatically lead to rejection of a personal loan application, it may easily lead to your loan being sanctioned with a higher interest rate or with a lower limit.
Lenders especially prefer high credit score in case of personal loan because it is an unsecured loan and a high score typically indicates lower risk of default. As there is no collateral attached to your loan amount, if you default there is no way the lender can recover the money from you. Therefore, lenders insist on high credit score i.e. individuals with lower risk of not paying back the amount borrowed.
Must Read: Tips to Improve Your Credit Score
Importance of CIBIL Score for Personal Loan Application
There are currently 4 credit bureaus or credit information companies operating in India – TransUnion Credit Information Bureau of India Limited (CIBIL), Equifax , Experian and CRIF High Mark. All four have different credit score models. The most popular among these 4 is TransUnion CIBIL. This is what makes a high CIBIL score particularly important for personal loan application approval.
The CIBIL score ranges between 300 and 900. The closer a person’s score to 900, higher will be his or her chances of getting a personal loan approved. Although different lenders have different criteria for approving a personal loan, generally a credit score that is closer to 900 i.e. 750 and higher is considered a good credit score.
Also read about CIBIL Credit Report
Benefits of a High CIBIL Score for Personal Loan
The following are some of the key benefits of a High CIBIL Score in case you are applying for a personal loan:
- Increased chances of approval as lenders perceive lower default risk
- Probability of lower rate of interest applicable to approved personal loan
- Higher loan limit sanctioned based on monthly income
- Increased chance of loan being sanctioned for desired tenure
While the above benefits of CIBIL score increase the chance of approval for a personal loan, your credit score by itself does not guarantee approval. This is because lenders consider other key factors such as your income level, job type, employer, job stability etc. in addition to credit score for personal loan as part of the approval process.
Things to Keep in Mind While Applying for a Personal Loan
- Before applying for a personal loan, you should definitely check your credit score. If you have a low credit score such as 650 or lower, you can work towards improving your credit score and plan your personal loan application at a later date. Also, by checking your credit report in advance, you can get the errors rectified before applying for a personal loan.
- Minimise your credit utilisation ratio (total credit availed/total available credit) to lower than 30% to improve your credit score as well as your chances of personal loan approval.
- Ensure that you don’t apply for loans with multiple lenders at the same time. These will be recorded as hard enquiries in your credit report and you will be seen as a credit hungry person by lenders. This will also negatively impact your credit score.
- If you have a low credit score be ready to pay higher interest rates even if your personal loan is approved. People with higher credit score are considered by prospective lenders to be at lower risk of default. Thus lenders will tend to charge a higher interest rate to those with low credit score as the risk involved in lending to such applicants is considered to be higher.
Must Read: Factors that Affect Your Credit Score