There are times when you might need funds for your dream home, medical emergency, or consolidated debts. During these situations, you consider applying for a personal loan, which is a great decision. But what becomes a hindrance when you approach the bank is a high interest rate, or worse, rejection of the personal loan. At this point, you will think as to why this happens despite you having a stable income. If you are thinking about what went wrong- the answer is in your CIBIL score. A CIBIL score is a financial metric assessed by lenders to understand your creditworthiness.
How Does The CIBIL Score Affect Personal Loan Interest Rates
Banks or lenders use the CIBIL score to understand the risk of lending money to a person. A high CIBIL score means a low risk, which will lead to great loan offers, but a low score indicates a risky affair, which will cause the interest rates to shoot up or even cause a lender to reject the loan application. It is also your responsibility to understand how to calculate personal loan interest based on the credit score that you have.
Let us take you through how the affected CIBIL score can affect personal loan interest rates.
Between 750-900
If your score lies between 750 and 900, you will be a low-risk borrower. This will lead to low rates of interest and usually ranges between 10-14%. Once you know how to calculate personal loan interest, it will be fairly easier for you to maintain your credit score especially if you are looking to get loans in the future. This score increases the chances of getting a loan approval and you can also negotiate for better loan terms. By seeing your credit behaviour in the past- lenders will be more confident in offering favourable conditions to you.
Between 650-749
For people with this score, it is still possible to get a personal loan but the interest rates will range between 14-18%. While an individual will secure a loan, lenders will impose strict eligibility criteria, reduced amounts than what is requested and less flexible terms. It is true that individuals with this score are not high-risk borrowers but uncertainties about their repayment capabilities worry lenders.
Between 300-649
This CIBIL score usually puts individuals in the high-risk category. There is a high chance that lenders will reject your application or choose to offer loans at interest rates of 18% or higher. Also, even if your loan is approved, you might have to bring a guarantor or co-applicant to reduce the lender’s risk. Another drawback of such a low CIBIL score is that the loan tenure and amount can be restricted, which makes repayment immensely challenging.
Impact Of CIBIL Score On Personal Loan Repayment Terms
It is important to understand that the CIBIL score not only influences the interest rate but it also affects several other aspects of personal loan repayment including loan tenure, loan amount eligibility and EMI flexibility. Here are a few things that you should know-
- A high CIBIL score allows for securing a long repayment tenure that can extend to up to 5-7 years. A long tenure can reduce the EMI burden which will make repayment easier and manageable. Similarly, if your CIBIL score is low, lenders will restrict your repayment tenure to a short period, probably two or three years. This increases your EMI amount which will make the repayment challenging and will also strain the monthly budget.
- The loan amount you will be eligible for is also dependent on the CIBIL score. A high score increases the probability of you getting a high loan amount because banks and lenders believe that you are a responsible borrower. People with low CIBIL scores face rejection or get approvals for lower amounts than requested.
- Borrowers with a great credit score receive good foreclosure and prepayment terms. Some lenders also waive prepayment penalties for these borrowers which can help them to close their loans early. This is the opposite in the case of low CIBIL score borrowers who will face strict conditions along with additional charges when they try to prepay their loans.
How To Improve The CIBIL Score For Better Personal Loan Interest Rates
If your CIBIL score is not ideal, you can take proactive steps to improve it and eventually get better loan terms. Here is how you can do so-
Focus on timely payments
An effective way to boost your credit score is by ensuring that you make timely payments on your credit card bills and your EMIs. This will represent financial responsibility and will also boost creditworthiness. Forgetting due dates can be a human tendency but if you set up automatic payment reminders, it will be immensely helpful.
Reducing credit utilisation
Another essential strategy to follow is reducing credit utilisation. Don’t max out on your credit cards, and keep the usage below 30% of the total limit. This is going to be enough proof for your lenders that you can manage your credit responsibly without relying on borrowed funds.
Limit loan applications
Do not keep applying for multiple loans within a short time period. All loan applications trigger an enquiry, which can impact the credit score. It is advised to research and compare the loan options before you keep applying here and there. This will help you avoid unnecessary credit checks.
Checking CIBIL report regularly
You should check your CIBIL report regularly. This will help you look for discrepancies or errors which can affect your score. If any inaccuracies are observed, like any incorrect details or loan repayment records, you should immediately report this to the credit bureau to ensure that only the right credit score shows.
Maintain a balanced credit mix
Maintaining a balanced credit can improve the score. The right combination of secured credit along with a few unsecured ones depicts responsible financial behaviour. If there is no diversity in the portfolio, go for a small personal loan to enhance the credit mix.
Length of credit history
A long credit history shows consistent and responsible use of credit. Lenders usually trust borrowers who have a long record of managing credits successfully.
Key Takeaways
If you are applying for a personal loan, you must know how to calculate personal loan interest based on the CIBIL score you have. Your CIBIL score can either help you get the best rates and loan tenure or get your loan approval cancelled altogether. Ensure that you maintain a good score by clearing your credit card bills and paying your EMIs on time.
