How CIBIL Scores Affect the Loan Approval Process?
Let us understand, the link between the CIBIL SCORE & Loan Approval :
When it comes to applying for a loan, whether it’s for a home, car, education, or any other relevant expense, lenders typically rely on a set of factors to make their decisions.
One of the most considered and practical factors that can hugely impact loan approvals and interest rates is your CIBIL score. In this blog today, we will explore the importance of CIBIL scores in loan approvals and will also get into what CIBIL scores are, how they influence loan criteria and interest rates, and why lenders consider them an influential part of loan processing.
What is cibil score & why does it matter?
If you are planning to apply for that "loan", hoping to get it on a low interest rate, and also want to make sure it is approved and processed instantly, you must make sure you have a great CIBIL score the reason why CIBIL score is a crucial decider in getting your loan approved.
The CIBIL score is a three-digit number issued by the Credit Information Bureau like TransUnion CIBIL, Experian, CRIF High Mark & Equifax. CIBIL scores and credit reports are issued to individuals. The range of numbers should be set down in between 300 to 900 and is based on a person’s credit history.
It is one very convenient way to understand a person’s ability to pay back the amount they intend to borrow. The CIBIL score is taken into consideration by banks and financial institutions before getting to the final conclusion on granting loans and issuing credit cards.
When an individual approaches a bank or a financial institution for a loan, the lender first checks the applicant’s CIBIL score and reports to check the credibility, and if the CIBIL score is shown as lower, the bank might not consider the application further or might as well grant the loan on higher interest rates and at the same time if the CIBIL score is high, the lender will consider the application and other details to understand and determine if the applicant is credit-worthy or not.
It is very much important to keep in mind that the credit score works as a first impression for the lender, the higher the score, the better your chances of the loan being considered and approved. The decision to approve or deny the loan is solely dependent on the lender.
FYI: Essentially, an ideal score of 750 is considered good!
How CIBIL Score Affects the Loan Approval Process?
Earlier the process and regulations used to be normal and easy to work upon, but now in order to get the approval of the loan lender’s review & analyze the credit history and CREDIT score of the applicant.
When applying for a loan the banks practically ask for a score of 750, which clearly indicates that you have been a low-risk customer with an intact history of timely loan repayment.
With a credit score of 750 or higher, you have all the approved chances of being accepted for a loan or credit card and at the same time banks are hesitant to extend your credit if you have a lower score and will almost deny your loan application.
Let us understand in detail the impact of CIBIL's score on the loan approval process.
An auto loan is solely used to buy a vehicle for personal purposes be it two-wheelers or four-wheelers and commercial vehicles well in the same context, you will receive up to 90% of the invoice value of the vehicle as a loan. Now, the repayment is based on your income and other requirements and the same is the case with an interest rate as it also depends on what type of the vehicle is and how much the loan amount is fixed.
Also if you are the one who does not have a credit score of 700 or more, you may still get a loan but now in this case the rate of interest on the loan will be on the higher side. So, you may end up paying more in the long form of run.
- The impact of credit score on auto loan approval process
You can depend on the auto loan to buy a vehicle and they are usually secured against the vehicle itself.
When you apply for auto loan below are the steps you need to perform :
- Fill the form of loan application
- Lend to the concerned bank or lender
- Bank will then check with the credit bureaus for the credit score.
- Low Cibil score leads to rejection and higher score will lead to approvals based on the submitted documents.
- The impact of credit score on personal loan approval process
As we all know personal loan falls down under the category of unsecured form of loan, and personal loans come with a high interest rate. There are no boundaries on the usage of the loan that clearly states that you can use the loan to pay for your child’s higher education, or you may spend it on your dream destination wedding.
When you apply for Personal loan below are the steps you need to perform :
- The amount of loan will be compared with level of your income
- The period of loan
- The profile of credit generated from the credit report
- Payment history analyses
- The profile of company
As mentioned the loan is unsecured, no such security is needed to shield the risk with any assets. There is no minimum credit score needed to submit a personal loan application. Since the bank is only offering you the money based on your good credit score, it will work like this, the higher your credit score, the greater your chances are of having your loan application granted quickly and smoothly.
- The impact of credit score on home loan approval process
You can always rely on the loan when it comes to buying your ideal property which is a mortgage loan. Chances are you may also borrow money against your existing property.
This is how it will work :
You may get a loan up to 80–85% of the property's cost and the payback period ranges from five to thirty years. Multiple factors like the city, location, current property rates, etc also play a role in interest rates. Along with the mentioned factors, your credit score plays a great role in the approval process for a home loan.
What lender needs to access the application;
- A great credit history
- The yearly and monthly income
- To check any ongoing EMI of the applicant
- To check any debts on the house or the property.
If you have a good credit score, banks will understand & analyze that you have always been a responsible borrower and you can repay the debt on time without any fail. Hence, the chances of interest rate will always be lower.
Why is credit score important for lenders?
Your credit score clearly displays your financial responsibility to the lenders and banks and it also shows how regular and sufficient you are when it comes to repaying the borrowed money.
In the same frame, there are two reasons your credit score is crucial for lenders while processing a loan application and they are listed below,
- Ratio of Debt-burden
This ratio highly prints out your degree of leverage. A high debt-burden ratio states that the applicant is in a high-risk category and thus could end up with your loan getting rejected by the lender and a low-debt-burden ratio states that the applicant is in a lower-risk category and thus could end up with your loan getting approved by the lender.
- The history of debt repayment
Your credit history has a huge part to play as lenders do not want to end up with borrowers who could turn risk by defaulting on their loan repayments.
The credit report has major information relating to your credit history like past loan repayment cycle, loan defaults, etc, which gives a lender a very precise estimate of your potential repaying capacity in repaying loans or credit card dues. Lenders always prefer borrowers who have a good and proficient credit history.
What are the benefits of a Good CIBIL Credit Score in Loan Approval Process?
Let’s take a closer look at how your good credit score can impact your loan approval process.
- Lenders, trust a good credit score and approve your loan application more quickly.
- Applicants with great credit scores often get the benefit of loans with lower interest rates.
- An exceptional CIBIL score allows you to have flexibility in repayment terms.
- Your greater score suggests a higher likelihood of timely repayment, making lenders comfortable with higher amounts of loans.
How can you improve your Credit Score?
Practically, improving credit scores can always take time and you likely won't see a huge difference overnight, but one thing that you should not stop doing is working on improving your cibil score.
- Keep an eye on your credit report, This will help you identify all the errors in your report.
- Paying your outstanding is essential as it is one of the factors that is taken into consideration while calculating the credit score.
- It is always advisable to keep your credit utilization below 30%.
- You can take out a debt consolidation loan from your bank and you can then simply pay it off and use it as your advantage.
Conclusion
Improving your credit score is an excellent aim to have, especially if you plan to either apply for a loan to make a major purchase in the future, such as a new property or house or get yourself qualified for one of the best rewards cards available.
It can take several weeks, sometimes several months, to see a noticeable effect on your score when you start taking steps to turn it around. Understand that consistency is the key.
