CIBIL Score for Personal Loan
You can never be sure when a financial emergency crop up. Even if you have savings, it is not a practical solution to drain them out completely in these cases. Instead, banks and financial institutions give you the option of a Personal Loan, which you can avail whenever you need.
As long as you fulfill certain eligibility criteria, you can get a loan in as less as 72 hours with most premier financial institutions today. One factor that affects the chances of getting a Personal Loan is your CIBIL score, which determines your creditworthiness.
What is CIBIL Score?
In order to avail any credit, be it a loan or a credit card, it is necessary to assess an individual's creditworthiness. This is the bank or financial institution's way of checking if the individual will be able to repay the loan or make regular payments towards the credit card.
The CIBIL score is used to determine this accurately. CIBIL or the Credit Information Bureau India Limited is a licensed credit information company that collects all possible information about your loans and existing credits. Using this, they compile a credit report each year. The details in this credit report are as follows:
- The employment history of the individual
- Track record of the repayments made towards different loans and credit cards
- Existing and outstanding credit
- Information about the applications submitted and enquiries made about loans
With this information, each individual is given a credit score between 300 and 900. An individual is considered to have good CIBIL score if it is closer to 900.
Each year CIBIL provides all members with a free credit report. This allows you to check and narrow down on the possible options to get a Personal Loan. If you need another credit report in the same year, you can subscribe to the unlimited access plans based on your requirement. You can get unlimited access for 1 month, 6 months or even a year depending on what loan and credit requirement you may have through the year.
What is Personal Loan?
It is an unsecured loan that is provided to individuals to fulfill any of their immediate financial requirements such as travel expenses, expenses towards higher education, medical emergencies, and even any expense towards domestic functions like a wedding. The most important characteristic of a Personal Loan is that it is a versatile loan without very few limitations on what the sanctioned amount may be used for.
You do not have to provide any security for these loans. The most important factor is that these loans are disbursed quickly. In some banks, you also have the option of pre - approval for these Personal Loans which means that you get approval instantly. Documentation is usually minimal with these loans and the processing time is also low.
There are a few eligibility factors that you need to fulfill in order to get a Personal Loan:
- The applicant should be at least 21 years old
- Loans are available for both self-employed and salaried individuals
- The individual should have a steady employment history. In the case of self-employed individuals, an experience of at least 2 years in the respective fields is a must.
- The debt to income ratio is important. Most often, the net income after all deductions, including the possible EMI on loan should be at least 40% of the gross income.
What Impact Does CIBIL Score Have on Personal Loan?
Since these loans are unsecured, credit history and CIBIL score play a very important role in deciding if you will be able to get a loan or not. Usually, a credit score above 700 is required by most banking institutions in order to get approval on a Personal Loan.
There are various factors that impact your CIBIL score and each of them has an impact on the Personal Loan as well. The table given below will help you understand how each of these factors impacts your chances of getting a Personal Loan.
|Factors Affecting CIBIL Score||Impact on Personal Loan|
Repayment history and track records of previous loans and credits
If you have defaulted repayment towards your loans or credit cards, it is an indication that you do not have the means to make regular payments. This reduces your creditworthiness and results in a low credit score. In this case, your chances of getting an unsecured Personal Loan reduce. You may be able to look at alternatives like loan against property to fund your financial emergencies.
Credit utilisation means how much of the available credit card limit you are using. For instance, if you have a credit limit of 1 Lakh and you use 50,000, the credit utilisation ratio is 50%. This helps keep the credit score high and in turn, increases the chances of getting an approval on the Personal Loan.
Too many credit cards or constantly increasing credit card limit
An individual with too many credit cards or one who has the habit of increasing the credit limit frequently is categorised as a credit hungry individual. This is an indication of poor spending habits, which reduces the chances of getting a Personal Loan or requires you to pay a higher rate of interest as you are considered a high-risk borrower.
Multiple loan applications
This is yet another indication of a credit hungry individual. If a person is credit hungry, it means that they do not have adequate financial sources to fund the necessary expenses. As a result, repayments on the sanctioned loan may also default. As a result, the approval on a Personal Loan is also affected.
Too many unsecured loans
For most banks, multiple unsecured loans are an indication of poor financial management or lack of necessary sources for expenses. This not only lowers the credit score but also affects the chances of the person getting approval on another unsecured loan.
How Does CIBIL Score Affect Personal Loan Interest Rate?
It is important to understand that the interest rates on Personal Loans are usually on the higher side. This is because the loans are unsecured and the bank or financial institution is already taking a risk by lending you the amount.
In addition to this, if you have a credit score below 700, you will be charged a higher interest rate as a means of securing the loan or getting maximum returns on loan.
Contrary to this, individuals who have a good credit score, above 700-750, are viewed as suitable candidates to provide a Personal Loan. You have the option of negotiating the Personal Loan deal that you get. Added to this, if you have maintained a good relationship with the banking institution with well-functioning accounts and regular repayments towards existing loans, you can expect a great deal on your Personal Loan.
Simple Steps to Get Personal Loan
Most Personal Loans today can be applied for online. The following steps will help you improve your chances of getting an approval on your Personal Loan:
- Make sure you check your credit score and credit report. With this, you can understand exactly what loans to apply for and what bank to approach.
- Compare several loan options available based on your credit score. You also have the option of checking the options available on cibil.com. This makes sure that you apply only in places where the chances of approval are high. You also reduce the risk of the application being rejected. Both these factors will affect your credit score.
- Fill the online form with necessary details like your name, employment status, and income details
- Once the loan application form has been submitted, authorised personnel will be assigned to collect the documents for the loan.
- The documents required are typically the loan application form, 2 photographs, income proof, ID Proof, and employment proof.
- After the documents are submitted, the application will be assessed. Once approved, the loan will be disbursed into your account in as less as 72 hours.
Simple Steps to Improve CIBIL Score
To increase your chances of getting a Personal Loan, the first step is to improve your credit score. This can be done with the simple steps mentioned below:
- Make sure that you make all repayments towards loans and your credit cards on time
- If you are applying for a new loan, it is a good option to settle an existing loan to improve your credit score.
- Before you apply for any loan or credit card, make sure that you have narrowed down your options. Multiple applications lead to lower credit scores.
- Maintain a good balance between your secured and unsecured loans
- Avoid applying for credit cards unnecessarily
- Do not increase the credit card limit too often
- Making use of cash withdrawals on your credit card too frequently is an indication of a poor financial condition and shows that you do not have enough income sources.