Why is a good CIBIL score crucial to get a personal loan

Lenders evaluate your eligibility for a personal loan based on various factors like age, income, employer profile, occupation and existing loan repayment obligations. In addition to meeting these criteria, a crucial element for personal loan approval is a high credit score. To grasp the significance of the CIBIL score in personal loan approval, it's essential to understand what a credit score is.

What is a credit score?

The credit score, a three-digit number ranging from 300 to 900, reflects your creditworthiness. A higher score implies lower chances of loan default and hence, lenders prefer lending to those having higher credit scores. .

India has four major credit bureaus—TransUnion CIBIL, Equifax, Experian and CRIF High Mark—regulated by the RBI and partnered with all creditors. These bureaus collect credit information, including payment history and credit accounts and enquires, from credit card issuers and lenders. Based on this information, they prepare credit reports and generate credit scores. Banks and NBFCs use these credit scores to assess loan and credit card applicantss and determine eligible applicants for pre-approved offers. It's essential to note that while credit reports detail payment history of various loan and credit card facilities, they don't include fixed deposit, savings or investment details.

Among the Indian credit bureaus, TransUnion CIBIL is the oldest and hence, CIBIL score is often used interchangeably with credit score.

Know the importance of CIBIL score in availing a personal loan

Determining Eligibility for Personal Loan

Your CIBIL score would play an important role in the approval of a personal loan, especially in case of lenders using CIBIL scores as their benchmark. If your CIBIL score falls short of the lender's specified threshold, your personal loan application may be denied. Those meeting the criteria undergo further eligibility checks during the approval process.

Determining Eligibility for Pre-approved Instant Personal Loans:

A higher CIBIL score increases chances for approval of pre-approved instant personal loan offers. These quick-disbursal loans are usually offered to existing customers with strong credit profiles. Such offers often come with lower personal loan interest rates, making them attractive to applicants with high CIBIL scores. Therefore, before applying for a personal loan, individuals with good CIBIL scores should check pre-approved offers from banks and NBFCs with which they maintain deposits and/or have availed loans and credit cards. 

Setting Personal Loan Interest Rates

Banks and financial institutions are increasingly using risk-based pricing approach to set the personal loan interest rate for their loan applicants. As higher CIBIL scores indicate lower credit risk, many lenders offer lower interest rates to personal loan applicants having higher credit scores.

What is the minimum score required for availing personal loans?

Most lenders prefer individuals with CIBIL scores of 750 or higher when offering personal loans. Nevertheless, the minimum CIBIL score criteria for personal loan eligibility varies among lenders. Some lenders may also provide personal loans to individuals having low or no credit history, but they often charge higher interest rates to mitigate increased credit risk.

How can you improve your CIBIL score

Lenders are inclined to approve personal loans for individuals with CIBIL scores of 750 and above, as these scores reflect responsible credit behaviour and therefore minimize credit risk for the lenders. To improve credit score, applicants can follow healthy credit practices such as paying credit card bills and EMIs by their due dates, avoiding frequent inquiries for loans and credit cards and reviewing CIBIL report on periodic intervals. 

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