Importance of Credit Score when applying for a Loan

When applying for any loan, you need to fulfil certain eligibility criteria. Fulfilling the eligibility criteria gives the lender a sense of surety that the borrower can repay the loan. However, how does the lender assess the repayment capability of the borrower? What if the borrower has defaulted on his previous loans? How will the lender get to know about this?

The answer lies in the credit score. So, what is a credit score and why is it important? Let’s understand the different points the lender looks at to determine the eligibility and repayment capability of the borrower, giving prime focus to the CIBIL score.

Factors determining repayment of loans

MFollowing are some of the important points that provide crucial information and surety for the repayment of loans:

• Income of the Borrower: What is the borrower's income and how is the income utilized provides crucial information as to the amount of EMI that borrowers can repay.
• Banking of the Borrower: If the borrower receives income in his bank account, then this provides further surety to the lender as to the borrower’s income.
• Value of the Security: If the borrower provides any security to the lender, then it assures the loan's recovery in case the borrower defaults.
• Credit Score: Credit score gives a snapshot of the past credit behavior of the borrower.

What is a Credit Score?

A credit score is one of the most important determinants of the repayment capability of the borrower. It is a 3-digit number that gives a snapshot of the credit behaviour and performance of the borrower. CIBIL score range is between 300-900, and the higher the credit score, the better the credit behavior of the borrower. Ideally, the credit score should be above 750 to ensure seamless loan processing.

How does the Credit Score work?

Whenever you take a loan with a bank or a financial institution, the concerned lender reports it to the credit bureau. Once the EMI starts, you need to pay your EMI timely. This depicts good credit behavior and increases your credit score. Conversely, if you miss out on your EMI payment for whatever reason, your credit score may take a hit. Consistent non-repayment of EMI will damage your credit score. Over the period, you may become ineligible to get a loan.

Why do credit scores matter?

The importance of CIBIL score cannot be undermined, as the credit score showcases your repayment capability. It is important to have a good credit score when applying for a loan. Following is the credit rating importance and how it can influence your loan application:

• Approval or Rejection: Credit score can be a deciding factor for approval or rejection of your loan application. Most lenders require you to have a minimum credit score for availing of the loan. If you fail to satisfy these criteria, your loan application might get rejected even though you have a good income.
• Lower Interest Rate: The best credit score reduces the risk for the lender. Thus, the lender will be comfortable granting you the loan at an affordable interest rate.
• Faster Approval: A good CIBIL score will assist in faster processing and approval of the loan application. As the lender has the confidence of the borrower, it may process the application faster, resulting in faster disbursal of the amount.
• More Options: The best credit score unlocks more options in terms of lenders. As you might fulfil the eligibility criteria of most lenders, you can compare and select the one that provides the best terms.
• Higher Loan Amount: A good credit score allows you to get a higher amount of loan. This is because the lenders are usually assured of repayment and therefore, can help you claim a higher loan amount.
• Longer Repayment Periods: You can negotiate better terms with lenders if you have a good CIBIL score. Lenders may also grant you the flexibility in selecting the loan tenure and you may get a longer tenure, thus reducing your overall loan EMI.

In a Nutshell

Having a good credit score is crucial to getting a loan at an affordable interest rate and better terms. Wondering about how to improve CIBIL score? You can improve it by repaying your EMIs on or before the due date, maintaining a proper mix of secured and unsecured loans, timely repayment of credit card bills, etc. Apart from the credit score, it is equally important to select the right lender for a seamless loan experience.

IIFL Home Loans is a reputed financial institution that provides you with loans at affordable interest rates and flexible terms. You can apply for home loans, loans against property, secured business loans or balance transfer your existing loan for better terms. To know the amount of EMI you will need to pay, you can use the Home Loan EMI calculator. By just entering the loan amount, interest rate and tenure, you can know the exact amount of EMI you will have to pay over the tenure of the loan.