Why do lenders check your CIBIL score before approving your loan

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

Know the reasons why Lenders check your CIBIL score

Lenders review borrowers’ credit scores for the following reasons:

• Determines loan eligibility

Lenders check the credit scores of borrowers to determine their eligibility for the loan amount. If a borrower’s credit score is within the desired limit of 750 and above, he is considered a person with less credit risk and therefore is offered faster loan approval. Especially for unsecured credit options like personal loans, maintaining a healthy credit score is mandatory as lenders have no collateral to fall back on. It is a vital parameter based on which lenders process the loan application, decide the loan amount and other loan details.

The CIBIL score is the numerical representation of a borrower’s credit score. Before approving the loan amount, the lender checks the CIBIL score as it gives them an idea of ​​the borrower’s ability to make EMI payments as per the repayment schedule. Therefore, it is the responsibility of the borrower to maintain a decent CIBIL score as it shows that he effectively handled the repayment of EMI earlier which helped him to receive approval for an amount of substantial loan at an affordable interest rate.

• Decide on the interest rate

The CIBIL score influences interest rates, loan amount and repayment term. Borrowers with a good credit rating are more likely to obtain a loan at a competitive interest rate. Securing an affordable loan rate reduces the burden of IMEs and helps borrowers save significantly on borrowing costs. Additionally, a robust CIBIL score gives borrowers an edge in negotiating better loan terms. The interest rate influences the EMI payments and the cost of borrowing, so try to get a lower loan rate

On the other hand, borrowers with CIBIL scores below the standards are charged a higher interest rate or their loan application is rejected. Therefore, one should strive to maintain a healthy credit rating.

• Loan application approval

A credit score is proof of credibility. A higher credit score shows that the individual has a clean repayment record, which facilitates faster loan processing. It acts as a catalyst in the smooth running of a borrower’s loan application. A score of 750 and above shows that a person has unlocked the loan amount on time, which reduces the lender’s risk and increases the chances of getting a quick loan approval. Borrowers with a strong credit rating are eligible for a Personal loan. Lenders may be reluctant to extend loan approval to people with a lower CIBIL score.

Lenders also check the CIBIL score to decide the loan principal. A higher credit rating will allow borrowers to avail substantial loan amounts. As lenders have certainty about the repayment capacity of the borrower, they can disburse large loan amounts. Therefore, borrowers should strive to maintain a healthy and decent credit score.

• Review the number of new requests

By reviewing a borrower’s credit score, lenders can verify the number of loan applications borrowers have applied for. Every time borrowers apply for a loan, lenders review their credit report, which is called a thorough investigation. Multiple loan applications will result in multiple difficult inquiries. These inquiries are flagged, affecting the credit score and resulting in a credit rejection.

Additionally, borrowers who applied for multiple loan options are portrayed as desperate for credit and are considered high-risk borrowers. Therefore, borrowers should refrain from applying multiple credit options in a short period of time.

In addition, borrowers with higher credit ratings can take advantage of specialized offers offered by lenders. A decent credit rating allows lenders and borrowers to come to terms 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 incentivizes them to offer specialized offers such as pre-approved loans, credit card offers, etc., thereby increasing their profit margin. Moreover, these offers motivate borrowers to maintain a higher credit rating.

Apart from verifying the CIBIL score and maintaining a high score, borrowers must also adhere to the other eligibility parameters including age, income status, etc.

Know the ways to improve the CIBIL score

In case borrowers have a CIBIL score below the average, they should try to improve it.

Borrowers should repay loan amounts and credit card bills on time to improve their credit score because paying off debts has a significant impact on credit score. Borrowers have to pay a penalty for missing or late EMI payments, which in turn lowers the credit score. Therefore, it is very important to be disciplined with credit.

Even the credit utilization ratio has a significant impact on the credit rating. Using the credit limit beyond the allotted limit will hamper the credit rating. It is therefore necessary to minimize the use of credit.

• Opt for a longer loan term

While borrowing, borrowers should opt for longer loan tenure as it will lessen the burden of EMI and help them to repay the loan amount on time. EMI payments on time will increase credit score.

• Refrain from taking too many loans

Taking advantage of multiple loans at the same time leads to multiple inquiries on the borrower’s credit report. Moreover, it is difficult for them to repay the loan amounts on time. If borrowers want to improve their credit score, they should avoid taking out too many loans.

In summary, maintaining a decent credit score is key to improving loan eligibility. This is because the lender looks at the score to determine their credit history, based on which borrowers receive loan approval and are charged an interest rate. Therefore, before applying for a loan, borrowers should check the CIBIL score.

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