The first and foremost thing a lender would assess while approving a loan is the CIBIL score of the borrower. A personal loan is a collateral-free loan, and hence, financial institutions need to know the credentials of the borrower before beginning the lending process. While a low CIBIL score decreases the chance of loan approval, multiple financial institutions facilitate the lending process, nevertheless. But before we learn about such cases, let’s first see how CIBIL scores work.
How Does a CIBIL Score Work?
A CIBIL score is a major determining factor of the entire borrowing process. Similar to the credit rating system followed in many countries, the credit score can be somewhere between 300 and 900. It is easier to gain confidence with the financial institutions with a high credit score. While a low credit score can be seen as a riskier transaction by the same institutions. The credit score assigned to you is based on the information about your repayment history. In other words, if you have made your home loan, personal loan, vehicle loan, and credit card payments on time, then you have a higher credit score. Missing any one of the payments can have a toll on your credit score and reduce the score to a significant level. Hence, you must have the idea of cibil score required for personal loan, it helps you for the instant approval og the loan.
Factors that can affect credit score negatively:
- Making loan defaults: Regardless of the loan type, missing the due date is going to affect your credit score tremendously. Defaulting the payment is considered as bad financial planning by financial institutions.
- Closing the gap on credit card limits: Having a vast difference between your credit card limit and borrowing will help maintain a good credit score. It is thus advisable not to get too close to your credit card limit.
- Credit card repayments: Just like personal loans, credit card payments are a significant obligation to repay. Not paying the credit card dues on time and paying just the credit card dues and not the full amount is also one of the primary reasons for a lower credit score.
- Not availing credits: Interestingly, not availing loans or not having a credit score means that the credit score is zero because there are no credit transactions in the account. To improve your credit score, you should start borrowing.
- Multiple application rejections: If your loan application in various banks and financial institutions gets rejected for some reason, your credit score will decrease.
- Settlement of credit scores: In case you have agreed with your financial institution to settle your credit card for a lesser repayment, you would typically have a lower credit score.
Do credit scores affect personal loans?
They do. And in a big way too. A high credit score increases the chances for a disbursal of an instant personal loan while a lower credit score can have its complications. Low credit scores can result in a higher rate of interest and delay in the approval process unless the banks show some solidarity with the borrower.
How to avail personal loan despite lower credit scores?
The first step is to improve the credit score to a significant level by repaying the current debts. Also, it is advisable to have the loan EMIs and credit card dues paid on time to improve the credit score further. The good news is that most Non-Banking Financial Companies (NBFCs) are ready to provide loans for low CIBIL scores with an appropriate rate of interest. In cases of personal loan rejection, you may also consider loan against collateral. Loans by a guarantor or joint loans can also help to avail personal loans in such cases. There are also scenarios of employer loans where the organizations have a tie-up with the banks and NBFCs.
Having a low credit score can hurt in the long run, but to avail personal loan you must have to maintain and increase your low CIBIL scores, you need some sound financial planning and an insightful discussion with your financial partner.