Why do lenders check your CIBIL Score before approving your loan?

The loan can be described as the essential amount of money that is borrowed by an applicant to fulfill his purpose which has to be returned to the lender in a specific period of time. The lender decides the particular rate of interest on the borrowed amount known as the principal amount & the borrower has to return the principal amount along with the pre-decided rate of interest.

There are 2 types of loans, secured loans & unsecured loans. 

1) Secured loans:- Secured loans are those which require collaterals i.e. the consumer has to provide an asset to the lenders. The rates of interest of secured loans are comparatively lower than unsecured loans. There are different types of home loans such as home loans, loan against property, loan against insurance policies, gold loans, loan against mutual funds & shares, loan against fixed deposits.

2) Unsecured loans: – Unsecured loans are those which don’t require any kind of collateral from the borrower. Because the lenders don’t keep any kind of collateral so it becomes quite risky for any lender to trust the borrow. In that scenario CIBIL Score comes into play. As the CIBIL Score is an indicator of borrower’s good credit history, the lenders need to check it before assigning any amount of loan to the consumer. The CIBIL Score tells the lender about your creditworthiness. It tells the lender if the borrower will be able to pay back the loan amount or not.

The CIBIL score is measured between 300-900. A high CIBIL Score gives lenders a green signal whereas a low Credit score raises a red flag. It’s not that you won’t be able to get a loan with a low CIBIL Score but it will come with several other terms & Conditions such as a high rate of interest. A high CIBIL score helps you to fetch a higher amount of loan whereas a lower CIBIL Score diminishes the loan amount. 

Different types of unsecured loans are: –  

  1. Personal loan  
  2. Short term business loan 
  3. Flexi loans such as education loans, vehicle loans 

Its always mandatory to keep track of all the payments installments & EMls to keep the CIBIL Score high. A borrower with high CIBIL score is always the 1st choice of any lender to provide the personal loan as they find the borrower risk free for any credit. A few steps can help you to raise your CIBIL Score such as good credit history, timely payment of all EMIs & other installments, keeping check on credit utilization ratio & avoiding multiple debts at one point of time etc. 

If you have a good CIBIL Score you can also bargain with the lender on the various charges involved in sanctioning of loans & rate of interest as well. So the CIBIL Score is an extremely important tool for lenders to choose the borrower. To become a risk-free borrower always checks your CIBIL Score try to keep it between 750 – 800.

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