What Is CIBIL Score: Understanding Its Impact on Loan Eligibility

When you apply for any kind of loan with a bank or an NBFC (non-banking financial company), your CIBIL (Credit Information Bureau India Limited) score or credit score plays a critical role in determining your eligibility and the interest rates offered. If you have a high credit or CIBIL score, you would have better chances of getting the loan approved faster, at competitive interest rates as well as be eligible to get a higher loan amount. 

However, if your CIBIL score is low, the lender may either outrightly reject your loan request or charge higher interest on the loan than others. If you are wondering why and how the CIBIL score has such a major impact on loan prospects, then this blog is just for you. Read on!

Before we delve into the impact of CIBIL score on loan eligibility, let us understand what it is exactly. 

 

What is the CIBIL score?

A CIBIL score is essentially your credit score assigned by one of the leading credit bureaus, CIBIL. It is a three-digit number ranging from 300 to 900 that reflects your creditworthiness. The credit bureaus calculate your score based on several factors, such as your past credit repayment history, credit utilisation ratio, length of credit history, and the number of credits obtained. 

All financial institutions in India that offer loans refer to your CIBIL score as part of the loan application assessment process to determine your eligibility as well as assess the degree of risk associated with extending the loan to you. 

 

How does CIBIL score affect your loan eligibility?

When you apply for any kind of credit, say a personal loan, you must do a lender-specific personal loan eligibility check. Most lenders have a minimum CIBIL score requirement for loan applicants, and it may vary from one lender to another. 

However, most financial organisations consider a credit score of 700 or more as a good score. If you have a high score, the lender will consider you a responsible borrower, and based on your good credit behaviour and score, you will have a better chance of getting the loan approved faster and with more favourable repayment terms. 

Your credit or CIBIL score not only influences the eligibility for the loan but also has a huge impact on the interest rate levied on the loan. Generally, financial institutions offer loans at competitive interest rates for borrowers with high credit scores of 800 or more, as they are seen as least likely to default. 

A difference of even 50-100 points can make a significant difference in the interest rate offered to you and your affordability for availing the loan. A higher interest rate means your EMI will be high, and repaying the monthly instalments can be challenging while managing your other expenses. 

 

Let us understand the impact of CIBIL score on loan eligibility with an example. 

Miss. Priya Shinde and Mr Amit Mehta both apply for a loan of Rs. 5 Lakh with the same lender, and they both choose a repayment tenure of five years. Miss. Shinde has a CIBIL score of 830 and when Mr. Mehta did a CIBIL score check online, he found out his score was 639. 

Now, the lending organisation assess their application and since Miss. Shine has a high credit score, so they offered her the loan at an interest rate of 12% per annum. Whereas, for Mr. Mehta, they offer the loan at 16%. Although the difference in the 4% interest rate may seem small, it can have a significant impact on the EMI and the overall amount repaid through the tenure. 

 

The following table will give you a better understanding:

 

Borrower’s Name	CIBIL Score	Interest Rate	EMI Amount	Total Interest Paid
Priya Shinde	830	12%	Rs. 11, 122	Rs. 1,67,320
Amit Mehta	639	16%	Rs. 12, 294	Rs. 2,37,640

 

As it is evident from the table above, having a higher CIBIL score helps Mis. Shinde to enjoy a savings of about Rs. 70,000 on interest payment as compared to Mr. Mehta. 

Now that you know how the CIBIL score influences loan eligibility and interest rates let us understand the factors that affect the CIBIL score. 

 

• Payment history

Your record of paying bills and dues, including loan EMIs and credit bills, has a huge impact on the CIBIL score calculation. If you miss the payment even by a single day or delay the payment, your credit score will take a massive dip. So, make sure that you clear all your dues on time to maintain a high credit score. 

 

• Credit utilisation ratio

This ratio reflects the amount of credit you avail against the total credit limit available to you. It is advisable to maintain your credit utilisation ratio to 40% or less to maintain a good credit score. 

 

• Credit mix

Having a diverse mix of credit types in your portfolio, like secured loans (home loans, loans against property) and unsecured loans (personal loans, credit card loans), can have a positive impact on the CIBIL score. 

 

Conclusion

CIBIL score is undoubtedly one of the critical factors that lenders consider when evaluating loan applications. A high score can help you get the loan at a lower interest rate. So, make sure that you always maintain a high credit score. 

Also, it is better to apply for a loan with reputed lenders like India Shelter, one of the leading NBFCs in India. They offer a wide range of loan solutions at attractive interest rates. Also, the flexible repayment terms and quick approval process give you a seamless borrowing experience.