How is a Personal Loan granted based on CIBIL Score?


Personal loan, unlike an auto loan or a home loan, does not restrict you on the usage of borrowed funds as long as they are being used for any legal work. It is an unsecured loan and does not require any collateral or security from the borrower. Many a time, there are emergencies or a major expense for which you do not have sufficient funds. At such instances, you can always resort to a personal loan. The loan can be taken for numerous reasons such as wedding, remodeling of the house, holidaying or in times of medical emergencies.

Accounting and LoansAs these loans give flexibility to the borrower to use the funds and do not require collateral these loans are given purely looking at the credit worthiness. In case of a home loan, the lending institute is secured by the property of the borrower, or the vehicle in case of an auto loan, but as far as personal loan is concerned, the onus of risk is completely on the lender. Hence, before granting a personal loan to you, the lender would look at your CIBIL score and depending on the score will judge your capacity to repay the debt.

CIBIL score, a three-digit number in the range of 300 to 900, is a kind of scorecard to tell the lender about your creditworthiness and previous credit history with regards to your previous and existing loan repayment. As this score gives a clear insight to the lender, it has a great bearing on the chances of approval or disapproval of your loan. As there is no collateral involved in the case of a personal loan, this score becomes the most critical factor in determining the repayment capacity. A low score indicates poor creditworthiness and hence may lead to rejection of the loan application.

To give you an understanding on how and on what terms loans may be granted to you, let us look at the following table:

CIBIL score What does it tell the lender about the borrower? Loan Approval Interest Rate
750-900 Indicates good creditworthiness and impeccable credit history Loan approval without hassle on your terms and conditions Interest rates would be the lowest for you if you are in this category
749-550 Indicates some prior delayed payments or higher credit Loan will be granted but on banks terms and conditions Interest rates charged would be relatively more as compared to the previous category
549-350 Indicates a very poor credit history and defaults in the past. This is the lowest score on the band Chances of loan approval from a bank are unlikely Interest rate charged would be very high, as banks perceive you in the most risky category of borrowers

For a personal loan, CIBIL score is the most important factor for approval despite there being several other factors, such as age of the applicant, income and employment type. To ensure that your application is processed hassle-free and at the lowest possible interest rate, a score above 750 is considered good.

Tips on how to improve or maintain your credit score:

As it is important to keep your score high here are a few tips which can help you keep your CIBIL score high, which would eventually contribute to your loan being approved on favorable terms and conditions.

Pay your existing credit card dues.

Credit card debt

There is no harm in using a credit card. It is not what determines the score, it is how you use it and repay your dues which determine your score. If you are making all your monthly payments on time and do not have any late fee then the chances are that your credit card history will boost your CIBIL score. Hence, always ensure that you pay all your monthly dues in full and not just the minimum balance amount.

Check your credit report and update previous debts paid off.

It is always advisable to check your credit report before apply for a loan and also to update previous debt which you have cleared in the past. Not only does it indicate seriousness and due diligence on your part, at times it can help you keep a track if the previous records have been updated correctly.

Pay all your bills and monthly EMI on time.

Always make sure that you are paying all your bills and EMIs on time. To avoid missing out on the due date you can always opt for the auto debit facility, which is a standing instruction to the bank for the payments.

Do not become a guarantor for loans taken by others.

If you become a guarantor to someone else’s liability then in the event of non payment of dues by the borrower, it will show in your account and you may also be liable to clear the debt. Hence, it is always advisable to not become a guarantor to others loans.

Do not make multiple applications or apply immediately after rejection.

Application rejection

Making multiple applications or applying frequently indicates that you are credit hungry and may lead to lowering your credit score.

Keeping your CIBIL score high is just a matter of being disciplined in your financial matters and does not involve any rocket science. It is always better to maintain your CIBIL score as high as possible in all cases and especially important to have a score of 750 and above when applying for a personal loan as it can make a huge difference in the interest rate and the terms and conditions on which the loan is granted.  And if your score is below 750, do not be disheartened, the score keeps getting updated, so if you start bringing about a change in the way you handle your finances, you can change this score to your advantage over a period of time.

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