Home / Brand Stories / Why do Lenders Check Your CIBIL Score before Approving Your Loan

There are several parameters based on which lenders disburse loan amounts, one of such being the CIBIL scores. CIBIL score is the three-digit numerical summary of an individual’s repayment record, financial behaviour and credit worthiness. Hence, it is essential for individuals seeking a loan to have a decent credit score. 

Applicants with CIBIL score of 750 and above are considered financially disciplined and less likely to default on loan amounts. In addition, maintaining a healthy CIBIL score helps borrowers get quick loan approval and fetch affordable loan terms. Hence, before applying for a credit option, borrowers must check CIBIL score to ensure a quick loan approval. 

Know the Reasons Why Lenders Check Your CIBIL Score

Lenders scrutinise borrowers' credit scores for the following reasons:

  • Determines loan eligibility

Lenders check borrowers' credit scores to ascertain their eligibility for the loan amount. If a borrower's credit score falls within the desired limit of 750 and above, they are considered less credit-risk individuals and hence are offered faster loan approval. Especially for unsecured credit options like personal loans, keeping a healthy credit score is mandatory as the lenders do not have collateral to fall back on.  It is an essential parameter based on which lenders proceeds with processing the loan application, decides loan amount and other particulars of the loan. 

  • Reflects credit history

CIBIL score is the numerical representation of a borrower's credit score. Before approving the loan amount, the lender checks CIBIL score as it gives them an idea of the borrower's capability of making EMI payments according to the repayment schedule. Hence, it is the borrower's responsibility to maintain a decent CIBIL score as it shows that they have efficiently managed the EMI pay-out earlier, helping them receive approval for a substantial loan amount at an affordable interest rate.

  • Decide on the interest rate

CIBIL score influences interest rates, loan amount and repayment tenure. Borrowers with a healthy credit score have higher chances of getting a loan at a competitive interest rate. Securing an affordable lending rate reduces the EMI burden and helps borrowers significantly save on borrowing costs. Moreover, a robust CIBIL score gives borrowers an upper hand in negotiating better loan terms. Interest rate influences the EMI pay-outs and cost of borrowing, hence one must try to fetch lower lending rate ad 

On the other hand, borrowers with substandard CIBIL scores are either charged higher interest rate or their loan application is rejected. Hence, one must strive to maintain a healthy credit score.

  • Approval of loan application

A credit score is proof of credibility. A higher credit score shows that the individual has a clean repayment record, facilitating quicker loan processing. It acts like a catalyst in passing a borrower's loan application smoothly. A score of 750 and above shows that a person cleared the loan amount on time, which curbs the lender's risk and enhances the chance of getting quick loan approval. Borrowers with a robust credit score are eligible for a personal loan. Lenders can be hesitant to extend loan approval to individuals with a lower CIBIL score.

  • Decide on loan amount

Lenders check the CIBIL score to decide on the loan principal as well.  A higher credit score will enable borrowers to avail of substantial loan amounts. As lenders have certainty regarding the borrower's repayment capacity, they can disburse high-value loan amounts. Hence, borrowers must strive to keep a decent healthy credit score. 

  • To scrutinise number of new inquiries

By examining a borrower's credit score, lenders can check the number of loan applications, borrowers have applied for. Every time borrowers apply for a loan, lenders scrutinise their credit report, which is known as a hard inquiry. Multiple loan applications will result in several hard inquiries. These inquiries are reported, affecting the credit score and leading to credit rejection. 

Moreover, borrowers who have applied for multiple loan options are portrayed as desperate for credit and are considered high-risk borrowers. Hence, borrowers must refrain from applying multiple credit options within a short span.

  • Specialised offers

Moreover, borrowers with higher credit scores get to reap the benefits of specialised offers extended by lenders. A decent credit score allows lenders and borrowers to get along with their respective ends. A higher credit score allows lenders to offer higher loan amounts, and they also get the assurance of timely repayments. It also prompts them to extend specialised offers like pre-approved loans, credit card offers, etc., pushing their profit margin. Moreover, these offers motivate borrowers to maintain a higher credit score. 

Besides checking the CIBIL score and maintaining a high score, borrowers must also adhere to the other eligibility parameters which includes the age, income status etc.. 

Know the Ways to Improve CIBIL Score

In case borrowers have a subpar CIBIL score, they must try to improve it.

  • Clear Existing dues

Borrowers must repay loan amounts and credit card bills on time to improve their credit score as the repayment of the debts have a significant impact on the credit score. Borrowers have to pay a penalty fee on missing out or delaying EMI payments, which in turn lowers the credit score. Hence, it is very important for one to be disciplined with credit.

  • Limit credit utilisation

Even the credit utilisation ratio has a significant impact over the credit score. Using the credit limit beyond the allotted limit will hamper the credit score. Hence one must minimise credit utilisation.

  • Opt for a longer loan tenure

While borrowing, borrowers must opt for a longer loan tenure as it will reduce the EMI burden and help them repay loan amount on time. On-time EMI payments will level up the credit score. 

  • Refrain from taking too many loans

Availing multiple loans at the same time results in several hard inquiries on the borrower's credit report. Moreover, it makes it difficult for them to repay loan amounts on time. If borrowers want to improve their credit score, they should avoid taking too many loans.

To sum up, maintaining a decent credit score is vital to enhancing loan eligibility. This is because the lender scrutinises the score to determine one’s credit history, based on which borrowers receive loan approval and are charged an interest rate. Hence, before applying for a loan, borrowers must check CIBIL score.

Disclaimer: This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same.

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