Your CIBIL score plays a crucial role in personal loan applications. It helps lenders determine your eligibility and the personal loan interest rate. A high CIBIL score can get you a higher personal loan amount at competitive interest rates, while a poor score may lead to rejection or costly loan terms.
In this article, we will discuss how your credit score impacts your chances of getting approval for 10 Lakh Personal Loan or higher loan amount, factors that affect your credit score, and tips to improve it.
Firstly, let’s understand what a credit score is in brief.
A credit score is a 3-digit numerical representation of an individual’s creditworthiness. It ranges from 300 to 900 and is calculated based on several factors, such as an individual’s loan repayment or credit card payment history, their credit utilization ratio, length of their credit history, credit mix, new credit inquiries, and so on. The higher your score, the better your chances of getting approval for a personal loan.
Impact of credit score on your personal loan interest rates
Your CIBIL score determines your personal loan eligibility and influences the interest rate offered on the loans. Lenders offer the best rates for borrowers with high credit scores because they are considered less likely to default. Even a slight difference of 50-100 points in your credit score can have a significant impact on your interest outgo.
Consider this example: Ramesh and Arun both apply for a Rs. 20 Lakh Personal Loan with a 5-year tenure. Ramesh has a CIBIL score of 800 and is offered a 10% p.a. interest rate, while Arun, with a credit score of 650, gets a rate of 15% p.a. Let’s see how this difference affects their personal loan EMIs and total interest paid:
| Borrower | Credit Score | Rate of Interest | EMI | Total Interest |
Ramesh | 800 | 10% p.a. | Rs. 42,494 | Rs. 5,49,645 |
Arun | 650 | 15% p.a. | Rs. 47,580 | Rs. 8,54,792 |
Difference | 150 | 5% | Rs. 5,086 | Rs. 3,05,147 |
As the above table shows, a higher CIBIL score helps Ramesh save over Rs. 3 Lakhs in interest payments compared to Arun.
Importance of credit score in personal loan approval
- Creditworthiness: Credit scores are used by lenders as a tool to assess the borrower’s creditworthiness. A higher score indicates a lower risk of loan repayment default, giving lenders confidence in the borrower’s ability to repay the borrowed amount. An excellent credit score signifies responsible financial behaviour, making you more creditworthy for a personal loan and providing you quick approval.
- Personal loan eligibility & interest rate: Your credit score directly impacts your loan eligibility and interest rate. Lenders have specific credit score requirements for personal loans. Borrowers with higher scores are more likely to meet those eligibility criteria and receive more favourable interest rates, being less risky. A lower score means a lower interest rate, lower EMIs and instant approval.
- Loan amount & terms: Credit scores also affect the loan amount you can borrow as well as the repayment terms offered by lenders. Having a higher credit score may qualify you for a larger loan amount and provide you greater financial flexibility. Furthermore, individuals with good scores may get more favourable repayment terms, such as extended tenures, lower processing charges, etc., enhancing the affordability and approval chances for the personal loan.
Tips to improve your credit score for instant personal loan approval
- Make timely payment of existing debts: Paying your credit card bills, loan EMIs, and utility bills on time will help you establish a positive payment history.
- Avoid multiple credit applications: Limit the number of loan or credit card applications, as multiple credit inquiries within a short span can lower your credit score. Only apply for a loan or credit card when necessary and conduct thorough research before making applications.
- Maintain a low credit utilization ratio: Keeping your credit card balances low and trying to utilize only a small portion of the available credit limit will help you improve your credit score. A high credit utilization ratio can hurt your credit score.
- Monitor your credit report regularly: Keep track of your credit report for any errors or discrepancies. Address them promptly if required. Regular monitoring of your credit report helps you keep a check on your creditworthiness and take immediate corrective measures if needed.
- Build a strong credit history: Having a limited credit history is not good. Consider establishing a strong credit history by using your own or a co-authorised credit card responsibly. Building a positive credit history shows your ability to handle credit responsibly.
Your CIBIL score is a vital factor in determining your personal loan eligibility as lenders rely on credit scores to assess your loan creditworthiness, approval, loan amount, interest rate, and repayment terms. Maintaining a good credit score is crucial and can be done by practicing responsible financial habits.
