Personal Loans are one of the most popular forms of credit available to individuals. These loans can be used to finance various expenses such as medical bills, home renovation, wedding expenses, and more. To avail of this unsecured loan, you need to meet a Personal Loan eligibility criteria in India. Among all criteria, credit score is one of the most important eligibility requirement. You need to have a good credit score to opt for this unsecured loan. A credit score is a 3-digit number that depicts your creditworthiness. It is calculated based on your credit history, including your credit utilization and past repayment behavior.
One of the most commonly used credit scoring systems in India is the CIBIL score. CIBIL (Credit Information Bureau (India) Limited) is a credit information company that collects credit-related data from banks and other financial institutions. Based on this data, it calculates a credit score for each individual. A CIBIL score ranges from 300 to 900, with a score of 750 and above considered good. However, if your CIBIL score is low, it can lead to the rejection of your Personal Loan application.
Here are some reasons why a Personal Loan application may get rejected due to a low CIBIL score:
- Risk of default: Banks and Non-Banking Financial Companies (NBFCs) consider the credit score as an indicator of the borrower’s repayment behavior. A low CIBIL score indicates a higher risk of default, which makes the lender cautious about lending money. The lender may fear that the borrower may default on the loan, leading to a loss for the lender.
- High-interest rates: If your CIBIL score is low, the lender may still offer you a Personal Loan, but at a higher interest rate. This is because the lender perceives a higher risk of default, and hence, charges a higher interest rate to compensate for the risk. However, high-interest rates may not be affordable for some borrowers, leading to loan rejection.
- Insufficient income: Your CIBIL score is not the only factor that lenders consider while evaluating your loan application. They also look at your income, employment history, and other financial obligations. If your income is insufficient to repay the loan, the lender may reject your application, irrespective of your credit score.
- Multiple loan applications: Applying for multiple loans at the same time can negatively impact your CIBIL score. Each time you apply for a loan, the lender makes a hard inquiry on your credit report, which can lower your credit score. If you have multiple hard inquiries on your credit report, it can indicate credit hungry behavior and lead to loan rejection.
- Past defaults: If you have defaulted on a loan or credit card payment in the past, it can significantly lower your CIBIL score. Lenders view past defaults as a red flag and may reject your loan application, even if your current financial situation is stable.
Useful Tips to Improve Your Credit Score
If your Personal Loan application gets rejected due to a low CIBIL score, don’t lose hope. Just follow the below-mentioned tips to boost your credit score:
- Pay your bills on time: Late payments are one of the most significant contributors to a low credit score. Set up an automatic payment reminder to ensure that you clear your outstanding dues on time.
- Reduce credit utilization: Credit utilization is the ratio of your credit card balance to your credit limit. High credit utilization can lower your credit score. Aim to keep your credit utilization below 30% of your credit limit.
- Avoid hard inquiries: Limit your loan applications to avoid hard inquiries on your credit report. Since even a single hard inquiry can take a toll on your credit score and reduce it by a few points.
- Monitor your credit report: To maintain a healthy credit score, regularly monitor your credit report for errors and discrepancies. Dispute any issues with the credit bureau to correct them.
- Use credit wisely: Avoid maxing out your credit cards and taking on too much debt. Use credit wisely and only take on debt that you can afford to repay.
A low CIBIL score can be a significant hurdle in getting approved for a Personal Loan. Lenders use credit scores to assess the borrower’s creditworthiness and repayment behavior. A low CIBIL score can lead to loan rejection or higher interest rates. However, improving your credit score is possible with responsible financial behavior. Paying bills on time, reducing credit utilization, avoiding hard inquiries, and monitoring your credit report are some ways to improve your credit score. By doing so, you increase your chances of getting approved for an unsecured loan and potentially even securing a lower interest rate. Remember, responsible credit behavior is essential for maintaining a good credit score and financial stability.