Impact of Low CIBIL Score on Your Loan Application You Should Know!

Nobody wants to take a loan for fun; it is an unexpected situation that may necessitate immediate financial assistance. In such cases, personal loans may be an effective way to meet those financial obligations. It is critical to understand that a borrower’s creditworthiness, as assessed by their CIBIL score or CIBIL score calculation, has a substantial impact on the fact whether your personal loan application will get approved or not.

A good CIBIL transunion CIBIL score makes it easier to get your loan application approved faster and at a better interest rate. However, if you have a low CIBIL score, obtaining a loan with favourable terms may be difficult. In this post, we will try to understand what difficulties you might face if you have a low CIBIL score.

For the unversed, What exactly is a CIBIL Score?

A CIBIL score is a three-digit numerical assessment of a person’s creditworthiness that is used in the CIBIL score calculation. A higher credit score, which ranges from 300 to 900, implies a stronger credit profile. When approving loans, financial organizations such as banks and non-banking financial companies (NBFCs) use this CIBIL score to measure an individual’s creditworthiness. Because this score is essential to obtain a loan on favourable terms, it is best to maintain a healthy CIBIL score by practicing healthy financial behaviours.

However, if you currently have a low transunion CIBIL score and need a Personal Loan, you may face some difficulties. Thus, it is imperative for you to first check your credit score before applying for a personal loan. Financial organizations are more cautious to approve personal loan applications of those having poor credit scores since it raises the risk of default.

Difficulties you may face if you have a low Credit score. 

High-interest rate: Borrowers with poor credit ratings are considered high risk by lenders. They typically compensate for the risk by charging higher personal loan interest rates. This means that even if a person is approved for a Personal Loan despite having a low transunion CIBIL score, they may end up paying a lot more in interest over the course of the loan. If the need for which you are asking for a personal loan is not that urgent, try to delay the application and meanwhile work towards improving your credit score after doing the CIBIL score calculation then apply for the loan again.

Will not get approved for a higher loan amount: Even if your loan application is authorized, people with low CIBIL ratings may receive a reduced loan amount. Lenders are hesitant to disburse higher loan amounts to borrowers with low CIBIL scores in order to limit their potential losses.

Terms and Conditions will be stricter in some cases: Financial institutions may impose stringent terms and conditions on borrowers with poor transunion CIBIL score. Shorter repayment terms, higher prepayment costs, and tougher collateral requirements can all contribute to this, making it more difficult for borrowers to handle their loan commitments properly.

Comes with Limited flexibility: Loan repayment options for borrowers with low CIBIL ratings may not be flexible which individuals with higher credit scores will enjoy. Borrowers may have less control over their financial commitments if lenders only provide them with set payment arrangements.

No pre-approved offers: Even if you already have a relationship with the bank, your poor credit score may prevent you from receiving pre-approved loan offers. For example, if you are a salaried individual with a good salary, you will not receive any pre-approved loan or credit card offers because of your low credit score.

What is the Minimum CIBIL score I need to have?

Traditional lenders may be hesitant to approve personal loan applications to those with low CIBIL ratings. However, several of the biggest NBFCs provide Personal Loans to people with low transunion CIBIL scores. The needed CIBIL score for Personal Loans is between 720 and 750. A score below this may get you a loan, but at a higher interest rate and with less favourable terms. In order to improve your CIBIL score, this is what you can do meanwhile:

Check Your CIBIL Report on a Regular Basis: To track your credit score, you must monitor your credit report on a regular basis. Examine your score for inaccuracies, fraudulent activity, or wrong information that could be influencing it. To improve your credit score, dispute any mistakes you find then and there and check the same using CIBIL score calculation.

Get into the habit of paying on-Time Payments of Bills and Other EMIs: This is one of the most important steps you can do to improve your credit score. All of your bills must be paid on time on a regular basis. Priority must be given to meeting all obligations on time, including credit card bills, EMIs, and any outstanding debts. This improves your credit score by proving you are good at managing credit and shows you are a fiscal disciple as well.

Keep your credit utilization low: Your credit usage ratio, or the amount of credit you’re using in comparison to your total available credit, has a significant impact on your credit score. So, by paying off your existing bills, you can maintain your credit utilization ratio below 30%.

Diversify Your Credit Portfolio: Having a mix of different types of credit, such as credit cards, installment loans, and mortgages, will help your credit score positively.

Be cautious of Credit Applications: Every time you ask for credit, a hard inquiry is placed on your credit report, which can drop your score slightly. Apply for credit only when you truly need it, and spread them out over time.

Conclusion

Finally, having a poor CIBIL score can impact your chances of getting your personal loan application approved. It restricts the borrower’s access to higher loan amounts and disburses loan amounts at a higher interest rate. As a result, maintaining a strong credit score is critical for obtaining favourable loan terms and improving overall financial well-being.