Is a CIBIL score necessary for loan eligibility?

It is aspirational for an individual to want to own a home of their own, or to purchase their dream car. However, it may not be possible without some financial assistance, to help realise their dreams. Prior to availing of a loan, there are certain parameters to be taken into account.

The general criteria for availing a loan include income, existing loans and repayments details which reflect on the CIBIL report. These behaviours of repayment as captured in a CIR are reflected in the credit score as well. Over the last 10 years the CIR has become an integral part of decision making of banks and the behaviour reflected in a CIR can impact the decision of whether to approve or decline the loan.

What is a CIBIL score?

CIBIL, i.e. the Credit Information Bureau (India) Limited, is the oldest credit bureau in the country. TransUnion (TU), a multinational credit bureau and majority shareholder of CIBIL has developed a credit score basis the data available at CIBIL, and this score is referred to as CIBIL TU score or the CIBIL score. While there are newer entrants such as Equifax, Experian and CRIF High Mark and they also provide scores, currently most lending institutions rely more on the CIBIL score, and consequently a credit score is currently synonymous with a CIBIL TU score.  

Is a CIBIL score necessary for loan eligibility?

Once you apply for a loan and submit the application to the financial institution, they run a check with a Credit Information Company (CIC), or credit bureau for information such as the applicant’s previous credit history, repayment track record, number of loan and card accounts, EMI to income ratio etc. in the CIR. Higher the credit score on the report, higher are the chances of your loan being approved. Further, in most developed market the terms at which the loan is offered may also be better with a good score.

Should a credit score be low, or below average, chances are that a lender would be hesitant to approve a loan. While crucial to eligibility, scores help both the lender and borrower understand the credit history better. The credit score is indeed crucial in the approval process, and a healthy score would definitely go a long way in helping towards loan approval.

Broadly, lenders check CIBIL Score for factors such as previous repayment history, written-off cases, the amount of outgoing by way of EMI versus income, the number of loan and card accounts etc.

I’m a first time applicant. Will I get a loan?

It is very likely that a person applying for a loan may not have availed of a loan or credit card previously. This would mean that a credit report would not show up any relevant data, as there is no previous repayment history to take into consideration. In such cases, a lender may consider other parameters prior to approving a loan, as only a CIR would not suffice.

In the recent past, credit bureaus have started to provide a risk score to those individuals with no credit history. This data is indicative in nature, providing the financial institution a benchmark to assess the loan application.

While a low score need not mean the end of the road, it can certainly hamper your prospects of availing of a loan in the future. If the score is low on account of any inaccuracies in your CIR, it would be prudent to contact the concerned credit bureau to seek which institution needs to be contacted for getting the details corrected. If it is owing to poor financial health, it would probably be wise to take stock of the situation, and rectify it at the earliest.



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