A personal loan is an ideal choice to make for both salaried as well as self- employed individuals to deal with a financial emergency as it comes with flexible end- use, large amount, quick processing and flexible repayment options. A personal loan can be used to fund many circumstances like wedding, vacation, debt consolidation, home renovation, etc. Various factors including a credit score of an individual is taken into consideration before sanctioning a personal loan.
What is a CIBIL (Credit) Score?
A CIBIL (credit) score is a 3- digit numeric summary that is calculated by credit bureaus to determine your credit- worthiness. It is also considered as one of the most important factors during a personal loan and credit card approvals. CIBIL (Credit Information Bureau, India Limited) is one out of 4 bureaus in India (rest are Experian, CRIF High Mark and Equifax) that are authorized by RBI and are responsible for evaluating your credit score.
A good credit score reflects a good credit history and indicates that you are reliable and credit worthy. A poor credit score on the other hand is likely to lead to rejection of your loan application or higher interest rates.
Why is CIBIL Score Important for a Personal Loan?
As a personal loan is an unsecured loan and no collateral is required, the lenders need some guarantee to know if an individual is capable enough to repay the loan on time. CIBIL score that is a part of your pre- screening works as a reflection of your past repayments and helps the lender to decide if you are creditworthy.
How is CIBIL Score Calculated?
- Repayment history: Past repayments of loans and credit cards gets the maximum weightage as compared to the other factors and helps the lender to analyze if you would be disciplined with your payments in the future. Therefore, it is important to ensure timely payment of EMIs as if you are indisciplined with your EMIs and credit card bills, your credit score goes down
- Credit mix: Credit mix is the ratio of your secured and unsecured loans. An individual with more number of secured loans like car loan, home loan, etc. is preferred by the lenders when it comes to approving a personal loan and bureaus also give high credit scoring to such individuals. Ideally you should have a healthy mix of secured and unsecured credit
- Debt to income ratio: Debt to income ratio refers to the ratio of your monthly gross income and EMI payments/credit card dues. This ratio helps lenders determine your ability to manage monthly EMIs along with the other expenses. Therefore, a higher debt-to-income ratio decreases your credit score and makes it harder to get approved for new loan/credit card
Let’s say, if your gross monthly income is Rs. 58,000, you have taken a home loan with monthly EMI of Rs. 35,000 and there is also a personal loan EMI of Rs. 6,000. Now, you will be only left with Rs. 17,000 to deal with the other expenses. In such a case, more than 50% of your income goes in paying the EMIs and hence the lenders may not to consider you for another loan
- Credit utilization ratio (CUR): Credit utilization ratio is the ratio of your credit card limit and total outstanding amount. Lenders prefer to lend a personal loan to those with a credit utilization of 30% or less as an individual with high credit utilization seems to be credit hungry and is more likely to default with his repayments in future.
Let’s say, your credit card limit is Rs. 1 lakh and you utilize Rs. 70,000 to Rs. 75,000 every month. Therefore, your ratio comes out to be more than 50%. In such a case as you are breaching the 30% CUR mark every month, your credit score may decrease
What Are the Reasons for a Low CIBIL Score?
- Missing on your EMIs: If you fail to repay the your loan EMIs or credit card bills on time, your credit score will go down and you might also have to pay a late payment fee
- Applying for multiple loans or credit cards simultaneously: Whenever you apply for a personal loan or a credit card with any lender, he will see your credit report to check if you are credit worthy or not. Such an inquiry on your credit report is called a ‘hard inquiry’ and each of such inquiries takes your credit score down by a few points. Therefore, applying for multiple loans or credit cards at the same time might affect your credit score drastically
- Errors and fraudulent activity: In case your credit report has any errors, like a mismatch in your name, address, PAN etc., lenders may reject your personal loan application. There may also be credit activity against your name in the credit report, which you may not have done. This may happen due to an error by the bank or the bureau or due to a fraudulent activity that has taken place in your name. This may bring your credit score down. Thus, it is important to review your credit report regularly and report the errors to the credit bureau immediately
- Credit mix: As mentioned above, a credit mix is a proportion of your unsecured and secured debts. A borrower with more number of secured loans like car or a home loan is preferred by the lenders. If you have more number of unsecured loans like a personal loan or credit cards, you are not considered credit worthy. Therefore, to maintain a healthy credit mix, try to prepay your unsecured loans and increase the number of secured loans
Tips to Get a Personal Loan Despite a Low CIBIL Score
- Income: If you have high income and a low credit score, you may be in a position to repay the loan on time. You can ask the lender to consider it for a personal loan by submitting adequate income proof. You can also showcase your extra source of income like rental income to convenience the lender
- Choose a lower personal loan amount: There will be less risk involved from the lender’s side if you ask him to lend you a lower amount. In such a case, the lender might agree to lend you a personal loan if the loan amount is not significant
- Know about the tie- up between your employer and the lender: If you are working for a reputed MNC or a public sector organization, the lender may accept your loan application, basis your stable job and good reputation of your employer
- Consider NBFCs and digital lenders: There are a few NBFCs that offer a personal loan with a low credit score as they have their own model to check your eligibility. You can visit Paisabazaar to know about such NBFCs and compare their interest rate. However, the interest rate offered by such NBFCs is higher as compared to the banks
- Apply with a co- applicant: In case of a low CIBIL score, you can apply for a personal loan with a co- applicant like your spouse or parent. If your co- applicant’s CIBIL score is good and he meets the eligibility criteria, you may get a personal loan without any hassle. In case your low credit score is still a problem, you may consider taking a loan in your spouse or parent’s name
A good CIBIL score is mandatory to avail a personal loan but the above mentioned points might help you to get a personal loan even with a low CIBIL score. However, to avoid such a situation regularly check your credit score and work to improve it over time, so that it acts as an advantage and not a roadblock, when you apply for a personal loan.