17-Jun-2017 written by : FSI-Team
Anyone who is aware about how loans are sanctioned knows about the importance of the credit score in trying to get a loan approval. The credit scores in India range from 300 and 900 and a score above 750 is considered to be excellent. 79% of all loans that are disbursed are to applicants who have a CIBIL Score of 750 or above. CIBIL being the first credit rating agency for individuals has the first mover's advantage and is almost synonymous with credit rating in India. CIBIL score calculation is based on a number of factors; each factor considered over time impacts an individual's rating. While we accept that CIBIL scores are important for loan acceptance and one can see a general trend of loan acceptance/rejection based on the score; the acceptable scores may vary as per the loan type, lender's rules and a few other factors.
Well obviously if your score is above 750 you need not worry as getting a loan will not be tough as long as you fulfill rest of the requirements. A score below that merits this question. So does it mean you are not likely to get any loan from any lender if you have a score below that? No, this is not the case! A credit score is used as a risk assessment tool by the lender; this means the score indicates to them the level of risk they undertake when lending to a person with a particular score. This is one of the factors; a lower score may be acceptable in a secured loan as the lender has an asset to fall back on in case of a default which lowers their risk; this security is not available in unsecured loans.
It is clear from the discussion above that a score of 750 and above means that all lenders will be willing to sanction you a loan as long as you fulfill other formalities. A score below 750 but above 700 may prompt the lender to look at certain other aspects before they sanction a loan but in most cases getting a loan would not be a problem. If the score is below 700 then there are some doubts about getting a loan sanctioned. The lender may sanction a loan (at this score level) only after they do additional credit and background checks and find them satisfactory. If the loan is sanctioned it will be at a higher interest and a lower LTV ratio. Any score below 550 means that there is virtually no possibility of getting a loan sanctioned from the organized sector. The borrower with such a score would do well to try and focus on improving is overall financial situation rather that looking at borrowing more.
As we said earlier the type of loan does make an impact on the lender's decision. Since a secured loan like a home loan has an asset backing it, it poses lesser risk to the lender if the borrower defaults. By looking at the credit score as tool of decision making the lenders are trying to take a calculated risk. However in a personal loan there is no asset backing it so the risk for the lender is higher vis-à-vis a home or an auto loan. Thus the same bank may lend have different acceptable scores for different loan types. So while HDFC may give you a home loan at a score of 650 they may find this score unacceptable for HDFC personal loan. Getting a secured loan with a lower score is less challenging than getting an unsecured loan.
Main stream public and private banks are more particular about the credit rating. There is no universal acceptable score for all banks and as we saw in the above paragraph the same score may be treated differently depending on the type of loan you are seeking. Banks do have a blanket rule about acceptable scores; it varies depending on the loan type and some other factors too. If a bank has a corporate tie-up with an organization they will be more flexible when it comes to credit rating if employees of that organization were to apply for a loan.
Co-operative banks also are likely to focus less on credit scores of the applicant and the same applies to private money lenders too. However private money lenders charge exorbitant interest rates so that is big deterrent if one is looking at borrowing from them.
Following a few simple tips can ensure that you are credit healthy at all times and never have to bother about improving your credit score in case you are ever in need of a loan.