Credit scores have grown in importance and involvement in our financial lives since their inception. In addition to making it a primary factor in assessing credit applications, lenders have started to base lending rates on an applicant’s credit score.
Because of this, in today’s society, having a high credit score is considered a financial asset. However, because it is thought that people with low credit scores are less responsible with their money, they might have their credit application denied or approved but with a higher interest rate.
A loan is one of the most common forms of financing we will ever have, and obtaining one would be more challenging if you check CIBIL score and it turns out to be poor. However, in practice, that isn’t the case.
Regardless of how high or low your credit score is, understanding what is CIBIL score and knowing these crucial details about it will improve your chances of being approved for a loan:
Accept a lesser loan amount
Lenders take into account a variety of factors, including your credit score, income, and previous debt repayment obligations, when evaluating your eligibility for a loan. The loan amount that is eligible for consideration is then decided using the credit profile of the loan application and the credit risk assessment performed by the lender.
Therefore, getting less credit than is allowed tends to lessen the lender’s exposure to credit risk, raising the likelihood that loans will be granted to borrowers with low or nonexistent credit scores. This is because it’s possible that applicants with a bad credit history won’t always get the same credit as everyone else. As a result, applying for a relatively small amount increases your chances of being approved for a loan and being eligible.
Add a co-applicant to the application
Instead of immediately rejecting an application, loan lenders frequently ask for a co-applicant or guarantor when they have doubts about an applicant’s ability to repay the loan. This increases the likelihood that the loan will be approved. You may find a co-applicant or guarantor who meets your income requirements and has a good credit score more often if you have a low credit score, but it may also make it more difficult to get approved for a loan in the first place.
Lenders can approve loans faster because the co-applicant or guarantor is now jointly and severally liable for loan repayment. As a result, the lender’s safety net is increased. However, be aware that if there are any irregularities in loan repayment, adding a co-applicant or guarantor to your loan could negatively affect both of your credit scores. Therefore, bear this credit score factor in mind when you apply for and repay the loan. Ensure you do not forget to check CIBIL score of both yours as well as co-applicant/signor.
If banks reject your application, you might want to get in touch with HFCs and fintechs
Financial institutions like fintechs and non-banking financial companies (NBFCs) usually have less stringent evaluation standards than banks when it comes to loan applications. This often suggests that borrowers who have had bank loan applications rejected may still be qualified for approval. Due to their higher approval rates than banks, those who are thinking about getting a house loan but have a low credit score can turn to HFCs and fintechs after being rejected by banks. But bear in mind that because of the higher cost of borrowing, HFCs and fintechs usually have interest rates that are only marginally higher than banks’.
If you must, initially take a higher interest rate.
Understanding what is CIBIL score and then checking your score is no longer only necessary for credit eligibility; it is now increasingly crucial for getting a loan approved. Poor credit holders will pay higher credit card interest rates due to the growing trend of lenders basing loan rates on a borrower’s credit score. Paying a higher interest rate would still be preferable to having your loan application denied repeatedly, even though low credit scores are a common reason for loan application rejection.
Before selecting a loan, consider offers based on your credit score, monthly income, and other qualifying factors rather than accepting a high-interest loan. Make sure that your debt-to-income ratio—which now includes the new EMI—remains between 50 and 60 percent as you fulfil the monthly instalment payment schedule for your loan. In order to lower your interest payments, think about taking out a longer-term loan. To lower the total amount of interest you pay, try to pay off the loan early.
Furthermore, your credit score will gradually improve if you repay your loan on time and as soon as possible. You might be able to move your debt to a new lender that gives you better terms and a lower interest rate than the one you are currently with once your credit score reaches a respectable level. Make sure the total interest savings when making this decision outweigh any associated costs, such as processing and administrative fees, as the new lender will treat the balance transfer as a new loan application.
You should consider what to do after taking out the loan in order to improve your credit score now that you are aware of the numerous options available to help you obtain a loan despite having a low credit score.
Keep in mind that failing to make credit card or loan payments on time can result in an anomaly that lowers your credit score and shows up on your credit report. Therefore, make sure you always pay your credit card bills on time and in full, and that you never forget or put off paying the interest on your loans. Credit bureaus consider your credit mix, or the percentage of secured and unsecured debt, in order to gradually increase and/or improve your credit score. This will lower your total interest cost by increasing your likelihood of being approved for a balance transfer as an existing borrower with a high credit score from CIBIL. Make sure you check CIBIL score every month as well.
