How CIBIL Credit Scores Affect the Loan Approval Process?

For many people getting a loan has become difficult as the process is now what it used to be when the concept of loans started in India. These days, in order to grant a loan application, lenders review the applicant’s CIBIL credit score. Lenders may reject your loan application or provide you a loan at a higher interest rate or even offer you a loan at the best interest rate available in the market. However, it all boils down to your CIBIL credit score. 

CIBIL is a credit reference agency that keeps a tab on the credit history and all other credit information for everybody who has ever borrowed money. Banks, NBFCs, financial institutions, and companies that issue credit cards are among the members of this credit information bureau. These financial institutions send the records of their consumers regularly. Each consumer’s CIBIL credit history is then updated as per their financial behaviour. 

A CIBIL credit score is a numerical representation of a consumer’s borrowing habits. It will include the debt they have taken, the manner in which the debts are paid, type of credit accounts maintained by the consumer, age of the accounts, any delinquency. In short, every financial detail is recorded in a person’s CIBIL credit history. 

Before lending a loan, financial institutions and lenders assess the CIBIL credit report of the applicant to make their decision. CIBIL credit score of an individual help the lenders to understand the risk involved if they decide to extend a line of credit. 

CIBIL credit score and its impact on loan approval

When evaluating your loan application, banks typically want a score of 750, which suggests that you have been a low-risk customer with a solid history of timely loan repayment. With a CIBIL credit score of 750 or higher, you have a strong chance of being accepted for a loan or credit card. In contrast, banks are hesitant to extend you credit if you have a poor score and will almost certainly deny your loan or credit card application.

When it comes to loans, there are various kinds of loans that you may want to apply for. Let us understand in detail about the impact of CIBIL credit score on each of these loans. 

1. CIBIL credit score impact on auto loan approval process
   To purchase a vehicle, you can take out an auto loan. It may be a two wheeler loan or a loan for buying a car. The amount you will need to pay back is determined by various criteria in addition to your income. Another benefit is that you can borrow up to 90% of the vehicle's invoice value. Although there is no minimum CIBIL credit score requirement, getting a car loan is advised if your score is at least 700. 
   If you do not have a CIBIL credit score of 700 or more, you may still get a loan. However, the interest rate on the loan will be on the higher side. So, you may end up paying more in the long run. 
2. CIBIL credit score impact on a personal loan approval process
   As a personal loan is an unsecured form of loan, it already comes with a high interest rate. There are no restrictions on the usage of the loan. That means you can use the loan to pay for your child’s education, or you may spend it on your dream vacation. Since the loan is unsecured, no such security is needed to hedge the risk with any assets. There is no set minimum CIBIL credit score needed to submit a personal loan application. Since the bank is only providing you the money based on your good credit score, the higher your CIBIL credit score, the greater your chances are of having your loan application granted.
   If you have a low CIBIL credit score, you will get a personal loan at exorbitant interest rates. 
3. CIBIL credit score impact on home loan approval process
   You can always submit an application for a loan to buy your ideal property. It is a mortgage loan. You may also borrow money against your existing property. A loan of up to 80–85% of the property's cost may be provided. The repayment period ranges from five to thirty years. Numerous variables, like the city, location, current property rates, etc., affect interest rates.
   Along with the above-mentioned factors, your CIBIL credit score plays a huge role in the approval process of a home loan. If you have a high credit score, banks will assess that you have always been a responsible borrower and you can repay the debt on time without any fail. Hence, the interest rate will be lower. 

A CIBIL credit score between 750 and 900 is regarded as the best by the lenders to easily approve your loan application. This range suggests that the borrower has exercised financial restraint while making debt payments. Any CIBIL score between 550 and 700 is regarded as a moderate score, indicating that the borrower carries some risk but still has a chance of getting loans authorised. However, lenders flatly refuse loan applications of people having a CIBIL score between 300 and 549 as it indicates the borrower is very risky due to the probability of failing to repay the loan.

Reasons CIBIL credit score is important for lenders

Your CIBIL credit score reflects your financial responsibility to the lenders and banks. To elaborate, banks and financial lenders can quickly determine your reliability in repaying debts based on your CIBIL credit score. Apart from this, there are two (2) other major reasons your CIBIL credit score is important for lenders while processing a loan application. 

1. Comprehensive debt repayment history
   Lenders place a lot of weight on your credit history since they do not want to work with consumers who could become risky by missing loan payments. The CIBIL credit report contains important details about your credit history, such as prior loan repayment patterns and loan defaults, which give a lender a precise assessment of your probable ability to pay back loans or credit card balances. Lenders favour borrowers with solid credit histories, which are demonstrated by a high credit score on the CIBIL report.
2. To assess the debt burden ratio
   This ratio shows how much leverage you have as a borrower. A high debt-to-income ratio places a person in a high-risk category, which may result in the lender rejecting your loan application. Your debt should always be less than your income. Create a budget and manage your expenses in such a way that your debts do not overshadow whatever you earn.