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Why Is A Good Credit Score Required For Personal Loan Approval?

Personal loans are a convenient option for raising funds during a cash crunch. Due to their easy availability and unrestricted end use, personal loans have seen an unmatched growth of 3.8 times in volume and 2.3 times in value between FY17 and FY21. Unlike other loans which have specific end uses, you can take a personal loan for many purposes, like having a lavish wedding, buying an expensive gadget, or going on a luxury vacation. These loans are unsecured, and you do not need to worry about putting up collateral with the lender to get a loan.  

Personal loan eligibility is easy-to-meet, and customers find it convenient to fulfill the personal loan requirements. Among the few parameters that make you eligible for a personal loan, a good CIBIL score is of primary importance. 

What is a CIBIL Score?

The CIBIL score is a three-digit number that tells about the credit history of an individual. The credit history can be found in the Credit Information Report of a person, which contains the credit payment history for all the loans he has taken in his life from various lenders. It tells if the individual has been disciplined with his earlier credit payments or has defaulted on them.  The CIBIL score of an individual can be in the range of 300 to 900, and a score of above 750 is considered good enough by evaluators. 

Why is a good Credit Score Required for Personal Loan approval?

The CIBIL score or credit score is crucial to getting a quick personal loan. Personal loans are unsecured loans, and the borrower does not have to make a security deposit or keep an asset as collateral with the lender for the loan. Personal loan lenders do not have the assurance of a valuable asset like the security of the house for a housing loan, gold for a gold loan, or the car for a car loan. If a personal loan borrower defaults on his EMI payments, unlike these secured loans, the personal loan lender cannot sell off the borrower’s assets to recover his losses. 

It is why a personal loan lender needs to check the CIBIL score of the customer before extending a loan to him. The CIBIL score informs the lender about the past-payment records of the customer and indicates how sincerely the individual has repaid his earlier loans. An individual who exhibits a good past-payment record has a higher chance of not defaulting on future loans as well. 

A good CIBIL score acts like an assurance for the lender that he will not have any difficulty in recovering the money he lends to the customer. Thus, it is a primary requirement for personal loan approval. 

Parameters that Positively Influence the Credit Score

  • Timely debt payments give a boost to the credit score. 
  • Minimum outstanding loans and no outstanding due balance payment on the credit card positively affects the credit score. 
  • Less than 30% usage of the available limit on a credit card affects the credit score healthily. 
  • If no loan or credit applications were ever rejected, there was no loan or credit card settlement, or no hard inquiries, it also influences the credit score positively.

Parameters that Negatively Influence the Credit Score

  • Non-payment of credit card dues or loans, and late EMI payments negatively affect the credit score. 
  • Multiple unsecured loans from the same or different lenders bring down the credit score. 
  • Payment of only the minimum credit card due amount and repeated maximum usage of the credit card limit negatively influence the credit score. 
  • Rejection of loan or credit applications in the past and loan settlement with a lender hurt the credit score. 

How to Get a Good Credit Score?

You can take a few steps to increase your credit score and add to your chances of getting a quick personal loan.

  • Get your credit report for free from the CIBIL website and if there are any errors in the report, get them rectified. 
  • Before applying for a personal loan, ensure that your credit score is at least 750 or above. 
  • Do not randomly apply with multiple lenders for a personal loan to cut down the number of hard inquiries. 
  • Check the eligibility criteria interest rates, repayment options, applicable charges, etc., before applying for a personal loan. 
  • If you do not have a credit history, build a healthy credit score by taking a credit card and making regular and complete payments towards it. 

The Final Word

If you are planning to get a personal loan any time soon, first check your credit score online. You can improve your credit score and build a healthy credit history before applying for a personal loan to ensure loan approval.

Also Read: Instructions for Renewing One’s credit score

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