Apart from giving you access to a collateral-free high sanction, a personal loan can also help you improve your CIBIL score. If you are new to this term and are wondering ‘What is a CIBIL score’, read on to know more.
What is a CIBIL score?
In simple terms, your CIBIL score or credit score is a number that maps your creditworthiness. TransUnion CIBIL, one of India’s leading credit information companies, designates a CIBIL score for every borrower. It is a three-digit numeral ranging from 300 to 900, which CIBIL calculates considering your creditworthiness and debt repayment behavior.
Lenders consider a score of 750 and above as a good score. With a score like this, lenders will perceive you as a responsible borrower and consider you having a lower risk of default. With such a profile, you can negotiate the terms of any loan and thereby, get a cost-effective sanction on convenient terms. Usually, lenders are hesitant in offering a loan to individuals having a bad credit handling history, which is indicated by a low CIBIL score. In this case, they tend to sanction a loan charging high-interest rate.
After weighing these facts, you can clearly see how a credit score makes an excellent ground for lenders to evaluate lending risks associated with you. Just like a CIBIL score impacts your credit acquisition and repayment terms, a personal loan also affects your CIBIL score.
Here are 5 ways in which your personal loan affects your CIBIL score right from application to repayment.
When You Apply For a Personal Loan
For every personal loan application that you submit, lenders request for your credit report from a credit information bureau. This request is termed as a hard inquiry and gets recorded in your credit report. Irrespective of the approval status, multiple hard inquiries made within a short timeframe indicate you as a credit-hungry borrower. Further, multiple hard inquiries also impact your CIBIL score as with each query your score gets reduced by a few points. To avoid such consequences, compare your options well, check loan eligibility online in advance using personal loan eligibility, and then apply for a loan for which you qualify quickly basis simple terms.
Applying for a personal loan also adds a variety to your credit mix, which is considered good by certain credit scoring models. In fact, credit bureaus allot 10% of your credit score based on your credit mix. Thus, applying for a personal loan following minimal inquiries will actually improve your CIBIL score.
When You Are Repaying a Personal Loan
When you make regular repayments on your personal loan, your credit score increases. On the other hand, irregular repayments will hurt your credit score. When you miss one or more EMIs, it is considered as delinquency. Though this doesn’t have a severe impact on your credit score, missing multiple EMIs will result in default. Further, if your loan is overdue for 30 to 90 days, it can cause serious damage to your credit score. So, follow a well-thought budget and pay your EMIs on time in order to improve your CIBIL score.
When You Take a Personal Loan For Debt Consolidation
Consolidating multiple debts into a single personal loan will help improve your CIBIL score. If you avail of a personal loan to pay off a combined debt, your credit utilization ratio decreases. Furthermore, when you repay multiple debts in a single go, your debt to income ratio (DTI) improves in the long run. Lenders also look at your DTI when approving your personal loan.
This is because a lower debt to income ratio suggests that you have an adequate income to accommodate all your EMIs. This reduces your chances of default.
A high ratio, on the other hand, shows that you don’t have enough income to accommodate all your repayments. This shows that you may default on the loan, which increases the lender’s risk. Though a DTI doesn’t impact your CIBIL score directly, it can lead to rejection, which shows you as a high-risk borrower.
Now that you know how a personal loan impacts your CIBIL score, use it to your credit by managing it responsibly. Whether you want to avail a personal loan for debt consolidation or use it to fund your child’s education, research your options well before applying. Consider applying for a personal loan with reputed lenders like Bajaj Finserv to access a high-value sanction of up to Rs.25 lakh on cost-effective terms, which you can repay via a flexible tenor ranging from 12 to 60 months. You can add more ease to repayment by opting for the Flexi loan facility on your loan. Here you can withdraw from your sanction in parts, multiple times and pay interest only on what you use.
Moreover, you can get funds in your bank within 24 hours. All you have to do is meet simple eligibility criteria and produce minimal documentation. Before getting started, check your pre-approved personal loan offer to view your customized deal and expedite your financing.