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Impact of CIBIL Score on Loan Interest Rate

Recently, CIBIL has stated that if you have a credit score of 750 and above, the more likely the chances will be of your loan getting sanctioned. This has successfully amounted to 79% of the loan applications. The CIBIL credit score ranges between 300 and 900. The higher the score, the better your chances of getting the loan approved. With a good credit score, you can get a loan at a relatively lower rate of interest and on suitable terms and conditions. Banks will look at you as a creditworthy borrower who is capable of managing their finances and has successfully done the same with respect to your credit history. There is a lower probability of defaulting the loan amount or missing out an EMI.

CIBIL Score and Rate of Interest

To understand this better, let us know more about a loan. A loan is a borrowed amount which has to be paid back in installments to the bank with interest over a period of time. This borrowed amount comprises of two parts - the principal amount and the interest amount. The principal amount is independent of the CIBIL score and remains the same. What varies is the interest amount, that is the principal plus the interest rate amount applied by the lending bank. This rate of interest is depended on your CIBIL score. If you have a high credit score, banks will find it safer to lend you money. On the other hand, a low CIBIL credit score is least likely to get you a loan and at times, banks will often reject the loan application, even if you applied for one. If approved, the bank by default charges you a high rate of interest, and hence, it is better to check your CIBIL credit report and clear all credit history in order to improve your CIBIL score.

How are Interest Rates decided by the Bank?

There are different rates of interest for different types of loans, every bank and credit institution has its own tables and calculations for rate of interest. The CIBIL score heavily influences the rate of interest given to a potential borrower. Additional factors include your existing relationship with the bank. It is wise to borrow from a bank where you have some significant fund holdings. In case you are a senior citizen or have a different earning pattern, income from additional sources, the rate of interest will vary accordingly. The standard criteria is a low rate of interest for applicants with a credit score of 750 and above while the lowest rate of interest is offered to applicants with a CIBIL score of 850. For applicants with a score of 550 or above, banks will apply the highest possible rate of interest or will outright reject the loan application. Most banks do not entertain a loan request with a credit score of 500 or lower, the ones who do, will charge a rate of interest up to 30%.

How Low CIBIL Score can have an Impact on the Loan Interest Rates ?

A low CIBIL credit score can prevent you from getting a loan as banks will either reject your application or offer you a loan with a high rate of interest. It is advisable that you do not apply for a loan in case you fall under the category of a low CIBIL Score. A rejection will further downgrade your CIBIL credit score.

How High CIBIL Score can have an Impact on the Loan Interest Rates ?

As mentioned above, a high CIBIL credit score will enable you to get a loan easily at favorable terms and conditions with a lower rate of interest. Additionally, you can also check your CIBIL report which will give you details on your credit history. This will give you a better picture of any outstanding loan or credit card accounts.

FAQs On Effect of CIBIL Score on Loan Interest Rates

How does my CIBIL score affect my loan interest?

It is simple, a high credit score will get you a lower rate of lending interest, while a low credit score will get you a higher rate of lending interest.

Can I shift to a lower rate of interest based on my CIBIL score?

No, all banks on an annual basis, check the credit score of their existing borrowers and adjust the loan rate accordingly. Once the rate is decided while availing a loan, it stays fixed for a minimum of one financial year.

Can I avail a loan with a poor credit score?

Yes, you can always apply for a loan with a poor credit score, but it is most likely to get rejected by the bank. A low credit score does not guarantee a loan.

What is fixed and floating rate of interest?

Fixed rate of interest is the rate which remains fixed throughout the payback tenure while a floating rate of interest. A floating rate of interest is a variable rate of interest, it changes during the payback tenure.

What is the preferred credit score for a personal loan?

Financial institutions and credit lenders usually demand a minimum credit score of 750 for a personal loan. The interest rate for a personal loan usually varies between 10.65% to 24%.