CIBIL Score is one of the most crucial factors when it comes to decision making (by the lender) regarding who to lend to for most loans but not for all. CIBIL score allows the lender to decide which loan applications to accept and which to reject. Having said that it is important to remember that different lenders have different threshold levels at which they are willing to lend. Also for different types of loans the level of CIBIL score acceptable will also vary. For some types of loans CIBIL score is not even considered.
So while a bank may be willing to sanction an auto loan at the CIBIL score of 650 the same bank may not consider sanctioning a personal loan at that CIBIL Score. Again another lender may sanction a personal loan at the level but with a higher rate of interest. Loan for low CIBIL score is a possibility but this option is an avoidable one (this is explained in later part of the post).
The chart below explains how loan eligibility and Credit score are related.
Type of Loan:
As discussed earlier the type of loan is an important factor that determines if a particular CIBIL score is acceptable. Generally for loans that are asset backed a lower CIBIL score might be acceptable when compared to a non asset backed loan. In the case of an asset backed loan the lender has some asset to fall back on, for recovery but in an unsecured loan this is not possible. For a few types of loans like gold loans, loan against deposit or insurance policy or securities the lender will not even consider the applicant’s credit score. Depending on the asset and the lender’s policy 70% to 90% of the asset value is sanctioned as loan and the asset is mortgaged to the lender.
In case of a personal loan the lender has nothing to fall back on; in such a scenario they would be very stringent about who to lend to and will like to lend to those with a very health credit score.
Each bank decides at what score they are willing to lend as per their polices and guidelines. Generally mainstream private and public banks will be less flexible about this parameter. Private lenders, co-operative banks and HFCs etc might be more flexible when it comes to credit score. They might choose to overlook the credit score in case the prospective borrower has a deep, long relationship with the bank, or if there is a guarantor involved or they may be willing to lend at lower scores as a policy matter or with a higher rate of interest.
The credit score impacts the applicable interest rate that a customer has to pay for the loan. Lenders charge interest for allowing a borrower to use the money that is not his/hers and also for the risk they undertake when lending money. A higher risk profile is reflected by a low credit score; thus a lender might charge a higher interest and the converse is also true. Thus for a lower CIBIL score the borrower may be forced to pay a higher interest.
To Borrow or Not to Borrow with a Low Credit Score?
If you have a low CIBIL score the first thing to consider what type of loan you require. It is also a good option to consider loans that do not require a credit score as an eligibility criteria (examples discussed above) in case of a low credit score.
Some types of loan and lending institutions have room for flexibility so the borrower can explore the option of approaching a co-operative bank or make use of a guarantor or a co-borrower.
If the above is also not feasible then we come to the option of paying a higher than the prevalent interest and borrow from private lenders. This option is ideally avoidable as these loans are very expensive.
Ideally one should focus on keeping their credit score healthy and before borrowing try and start working a couple of months in advance to improve credit score. A low credit score indicates that all is not well with the financial health and adding debt is not a good idea in such a scenario. Instead of borrowing at exorbitant rates it’s better to try and improve your credit score and then borrow once things have improved. Loan eligibility for a particular CIBIL score is not universal; generally a score above 750 is considered good. For scores lower than that the type of loan, the lender’s policy and the borrower’s willingness to pay higher interest determine whether a loan will be sanctioned or not.