Getting a personal loan is one of the most common practices when people are in an emergency or need immediate access to funds. Personal loans are unsecured with almost negligible paperwork, which makes them easily accessible to everyone in the country. Though there are no extensive credit checks or paperwork, personal loan lenders do consider reviewing your credit report and CIBIL score. Therefore, if the score is low, a host of problems could ensue.
Does a low CIBIL score affect the rate of interest on your personal loan?
An individual’s CIBIL score plays an important role in determining the rate of interest of a personal loan availed by them. This is because these loans are unsecured and the lender could eventually face a loss if the borrower fails to repay. Therefore, a thorough check of one’s credit history is initiated and the rate of interest is decided so that it ensures that the lender’s risk is mitigated.
The CIBIL score is calculated upon how the person repayed their loans in the past, their credit card usage, and other financial decisions related to availing credit facilities. This score determines your creditworthiness and builds trust among the lenders if it’s high. The score ranges from 300 to 900 wherein a score of 600 to 749 is considered to be good enough while a score of 750 to 900 is considered to be excellent.
However, if the score is pretty low, that is, if it ranges between 300 and 549, there are high chance that it will impact the rate of interest on your personal loan. The personal loan’s rate of interest might be higher than usual as a low CIBIL score would imply that the lender would lend you a loan at a higher risk. Therefore, to mitigate the risk, lenders would be encouraged to offer you a loan at a higher interest rate.
Other disadvantages of a poor CIBIL score
Apart from an unprecedented increase in the interest rates for personal loans, one can also be barred from availing different types of credit facilities. Generally, such people can avail personal loans easily by agreeing to pay the higher interest amount, however, they would have to part with other loan options or credit facilities in case of a poor CIBIL score. This is because many financial institutions refuse to provide credit if their funds are at risk.