Personal loans are forms of unsecured loans (in most cases) taken for short or medium-term periods. They are taken in situations where an individual wish to borrow money for a short term expense, and they work like a financial cushion to enable smoother cash flows. A personal loan can be borrowed for various reasons like medical emergencies, house renovation expenses, debt consolidation, business cash flow needs, etc. However, since these are unsecured loans, lenders and financial institutions often gauge an individual’s creditworthiness before approving a loan. There are several factors that reflect a person’s creditworthiness, the most important one being a CIBIL score.
A CIBIL score is a score that is associated with an individual by credit rating agencies. You can also check your own CIBIL score online.
Key considerations of a CIBIL score for loan approval:
- Minimum CIBIL score required for a personal loan:
Every person’s CIBIL score falls in the range of 300 to 900. 900 is considered the highest, and anything above 750 is considered a benchmark for obtaining any form of credit. The higher your CIBIL score, the easier it is for you to acquire approval for car loans, credit cards, personal loans, home loans, etc. According to a report by the Economic Times on CIBIL data, 80% of the loans with a CIBIL score higher than 750 get approved. Hence, you must have a score of at least 750 to be eligible for securing any personal loan.
- Rate of Your Creditworthiness:
Independent agencies prepare CIBIL scores. And so, the scores which they release are authentic and unbiased. This is the reason that financial institutions and lenders often rely heavily on the score to ascertain your creditworthiness and ability to repay. A high score ensures that you can get a loan very quickly at lower rates of interest too. And a lower CIBIL score dims the chances of getting your loan approved quickly.
- Quick approval of Personal Loan application
Any form of loan can sometimes become a tedious process if there is too much verification and documentation. If you have a good credit score, your paperwork shall certainly move ahead at great speed. And a weak score lengthens the approval process.
Hence, it is said that a good CIBIL score is a strong asset for obtaining a smooth, easy, and cheap personal loan. But, the CIBIL score is not the only factor to help ascertain your creditworthiness. If you wish to acquire a personal loan on a low CIBIL score, several other parameters may help you strengthen your application. Here are some of the other factors which help determine the creditworthiness of an individual:
- Age: Greater the age, lenders consider you as being at greater risk of repaying your amount.
- Monthly Income: If you can show a steady and significant monthly income and prove your ability to repay the loan amount on time, it depicts greater trust and creditworthiness.
- FOIR/Debt to Income Ratio: If 70% of your monthly income goes into fixed expenses like rent, bills, EMI, etc., the lender sees this as a red flag on your ability to repay the loan amount and may reject your application.
- Stable History of Employment: If your resume reflects constant job-hopping, the lender might see this as an indication of instability, and it may dent your creditworthiness.
So, it is essential to keep track of one’s credit standing by maintaining a good CIBIL score and being frugal and wise with one’s expenditures.