If you’re considering applying for a personal loan, you’ve probably heard that a strong CIBIL score is crucial for approval. But what exactly is a CIBIL score, and what is the ideal score to secure an instant* personal loan? Let’s find out through this article.
What Is a Personal Loan and How Does It Depend on CIBIL Score?
A personal loan is an unsecured loan, meaning it is not backed by any collateral, unlike home loans or car loans. Personal loans are typically used for various purposes, including medical emergencies, home repairs, higher education expenses, or consolidating debts.
One of the key factors that lenders evaluate when considering an applicant for a personal loan is their creditworthiness, which is reflected by their CIBIL score. This score is generated by TransUnion CIBIL, one of India’s leading credit bureaus. In addition to CIBIL, there are three other credit bureaus in India: Equifax, Experian, and CRIF Highmark. The scores generated by these agencies are equally valid and commonly referred to as credit scores.
Lenders use the CIBIL score as an indicator of how likely you are to repay the loan on time. A high score demonstrates a good history of managing debt, while a low score suggests a higher risk for lenders. Essentially, the higher your CIBIL score, the easier it will be to secure a personal loan with favourable terms, such as lower interest rates and higher loan amounts.
What Should Be the Ideal CIBIL Score for Personal Loans?
The CIBIL score is a three-digit number ranging from 300 to 900.
Here is a breakdown of how CIBIL scores are typically categorised:
- 750 and Above: Excellent
- 700 to 749: Good
- 650 to 699: Fair
- 600 to 649: Poor
- Below 600: Very Poor
While the exact threshold can differ from lender to lender, a CIBIL score of 750 and above is generally considered ideal for personal loans. Some lenders may approve loans with a slightly lower score, but applicants may face higher interest rates and stricter repayment terms. In some cases, a co-applicant or a guarantor may be required to mitigate the lender’s risk.
Which Factors Influence CIBIL Score Calculation?
Your CIBIL score is determined by various aspects of your borrowing and repayment behaviour. Key factors influencing your score include:
- Credit Utilisation Ratio: This refers to the percentage of your available credit that you are currently using. If you have a credit card limit of INR 1 lakh and your outstanding balance is INR 50,000, your credit utilisation is 50%. A lower, ideally 30% or below, indicates that you manage your debt responsibly and are less likely to default, positively impacting your score.
- Timely Repayments and Credit History: The length of your credit history plays a crucial role in determining your score. The longer your history and the more consistent you’ve been in repaying loans or credit card bills, the higher your score will likely be. Lenders prefer to see evidence of a consistent track record of managing credit. On the other hand, missed or delayed payments will negatively affect your score.
- Credit Mix: This factor takes into account the variety of credit accounts you hold, such as credit cards, auto loans, personal loans, etc. A balanced mix of credit types can have a positive impact on your score, showing that you can handle different forms of credit responsibly.
- New Loan Applications: Each time you apply for a new credit card or loan, it triggers a “hard enquiry” on your credit report. Multiple hard enquiries in a short period can be seen as a sign of financial distress or desperation, which may lower your score.
Conclusion
Securing a personal loan is an important financial decision, and having a strong CIBIL score is a critical factor in making the process smooth and successful. Generally, a score of 750 and above signals to lenders that you are a reliable borrower, capable of responsibly managing and repaying debt.
To improve your credit score, focus on making timely payments on existing EMIs and credit card dues, maintaining a credit utilisation ratio below 30%, and avoiding frequent loan applications in a short period.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.