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Lenders assess your personal loan eligibility on the basis of several factors such as your age, income, occupation, employer’s profile and existing loan repayment obligations. However, besides meeting the required eligibility criteria, you also need to have a high credit score to get your personal loan application approved.
Before understanding the role of CIBIL score in personal loan approval, let us know what a credit score is.
What is a credit score?
Credit score is a 3-digit number (ranging between 300 and 900) that reflects your creditworthiness. The higher you score; the better will be your chances to get a new credit, such as a personal loan, approved.
There are four major credit bureaus that generate credit scores for individuals - TransUnion CIBIL, Experian, Equifax and CRIF High Mark. These credit bureaus are regulated by RBI and are in partnership with all creditors in India. Every month, credit bureaus collect your credit information such as your payment history, open and closed credit accounts and credit enquiries from various member credit card companies and lenders. On the basis of this credit information, they prepare your credit reports and generate your credit scores as per their own scoring model. As the scoring model of each bureau is different, your credit scores may vary across all credit bureaus. Banks and NBFCs fetch credit scores from these bureaus to evaluate credit card and loan applications and to determine eligible customers for providing pre-approved offers. Note that while your credit report includes payment history across loan types and credit institutions, it does not include the details of your savings, investments and fixed deposits.
Out of all the four credit bureaus in India, TransUnion CIBIL is the oldest. This makes CIBIL score almost synonymous with credit score among the masses.
What is the role of CIBIL score in availing a personal loan?
- Determining the personal loan eligibility
Your CIBIL score would play a vital role in your personal loan approval process, especially in cases where the lenders use CIBIL score over other credit scores for evaluating personal loan applications. In such cases, if your CIBIL score does not meet the cut-off CIBIL score set by the lender, your personal loan application might be declined. Those meeting the cut-off requirements would be considered for further eligibility checks as part of the approval process.
- Setting personal loan interest rates
Banks and NBFCs are increasingly using risk-based rate setting mechanism for fixing personal loan interest rates. As applicants having higher CIBIL scores indicate lower credit risk, lenders offer such applicants lower personal loan interest rates.
- Determining eligibility for pre-approved instant personal loans
Having a higher CIBIL score also increases your eligibility for instant personal loan offers. Instant personal loans are usually pre-approved loans, which banks and NBFCs offer to their existing customers having good credit profiles. Such loans usually have quick disbursal and may also be charged lower interest rates. Thus, before applying for a personal loan, applicants having high CIBIL scores should first check with banks and NBFCs with whom they have an existing credit card, loan or deposit accounts for any such pre-approved instant personal loan offers.
What is the minimum CIBIL score required for personal loans?
Lenders prefer offering personal loans to applicants having CIBIL scores of 750 and above. However, the minimum CIBIL score required for availing a personal loan may differ across lenders. Some lenders also offer personal loans to applicants having low or no credit history; however, they charge high interest rates to cover the higher credit risk.
Tips for improving your credit score
Lenders prefer offering personal loans to applicants having CIBIL scores of 750 and above as such scores can only be built by practising responsible credit behaviour, which thereby reduces the credit risk for the lenders. Here are a few tips that can help in building or improving your credit score:
- Repay your dues full and by their due dates
- Consider paying off unsecured loan(s) with high interest rates
- Limit your credit card utilisation or increase your credit limit
- Avoid frequent loan and credit card enquiries
- Review your credit report regularly for any wrong information