Will my parents’ CIBIL score impact my education loan?

An education loan can be the answer to many students’ dreams. With the rapidly escalating cost of education today, it is not surprising that many are availing of the option.

In India, there are four credit bureaus licensed to operate by the RBI, namely CIBIL, Equifax, Experian and CRIF High Mark. In the consumer space today, CIBIL is the front-runner being the oldest bureau, with Equifax being a close second. With the vintage that CIBIL enjoys, the term ‘credit score’ is often interchangeably used with the term ‘CIBIL score’, but do note that ultimately, all four bureaus provide credit reports and scores.

How is an education loan structured?

Education loans today are available for both under-graduation and post-graduation studies. A student can apply to any bank or NBFC for the same, and can look towards a large portion of their education expenses being met.

Typically, an education loan requires both an applicant (the student) as well as a co-applicant (in most cases, a parent, or if the student is married, the spouse). This is because when a lender extends an education loan, they are taking a call to lend basis the future potential of the student to earn an income post completion of study. Hence, to service the loan in the interim, a co-applicant is called on board.

Why is the credit score important?

As with any other retail loan product, your credit score plays a key role in the loan approval process. When you make an application for an education loan, the lender (whether a bank or financial institution) will pull up a copy of your credit report from a credit information company, or credit bureau. This report contains your score, a three-digit numeric representation of the data that forms your credit report.

When you apply for an education loan, not only is your individual credit report pulled out, but so is the report for the co-applicant. Hence, if the co-applicant has a bad or low credit score, chances are the loan application will be rejected.

It is important to know that the score is not the sole factor that a lender will base the decision on; however it is indeed a critical parameter. The higher your score better are the chances of the loan application being approved, hence it is critical to remain credit healthy. What a score indicates to a lender is the creditworthiness of an individual – both the willingness and the ability to repay outstanding debt.

Further, the score also plays a key role in determining the interest rate at which the education loan may be offered to you. A good score indicates to a lender that the applicant is able to use credit well, and is therefore more likely to provide the loan at the most competitive interest rates and other terms.

In conclusion

Given the sensitive nature of the loan, and that a student’s education may just hinge on it, it is up to the parent to ensure that they remain credit healthy. Should there be any inaccurate or erroneous information in their credit report, it should be rectified immediately.

A good practice would be to request for a copy of your credit report prior to making the loan application itself, so that you know what to expect. It is always better to be proactive rather than taking the necessary steps closer to the loan application.

Taking the help of a credit health management company may be a good idea, to monitor your score and better it over a period of time. Not only will this help with any other loan or credit card applications you choose to make in the future, but your immediate goal of ensuring your child’s education is successfully met.

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