Interest rate is the most important factor that one must consider while availing a new loan. Every time one applies for a loan, they expect the lowest rate of interest. To get a low rate of interest on a loan product, the applicant must have a high CIBIL score. A borrower desires for a low interest rate because then he has a lesser amount going out each month as a monthly instalment. Since the loan has two parts, the principal component and the interest component, when the interest rate is higher, the EMI will be higher as more money is going towards paying the interest component.
How are interest rates decided upon?
Though the banks specify a certain interest rate on their loan, they will not provide the same to every borrower. Banks refer your CIBIL score and offer you the interest rate that they seem fit. When you apply for a loan, the banks pull out your CIBIL report and CIBIL score. If your score is 750 and above, then there is a good chance that the bank will give you a loan at a competitive rate of interest. If you have a very high CIBIL score, you will have the advantage of bargaining for a lower rate of interest with the bank.
If your CIBIL score is way below 750, then you are at the mercy of the bank. You will have no bargaining power and the bank might see you as a risk as the credit score is measured on your creditworthiness. A poor credit score is a reflection of your poor credit behaviour. The bank might term you as a risk and may not even be sure that you will be able to repay your loan and hence they might just reject your application or offer you a loan at a very high interest rate to cover for the risk.
Before applying for a loan, it is advisable to check your CIBIL report and CIBIL score. It will show you what has led to the decrease in the CIBIL score and you can take conscious decisions to fix the score. The credit report shows you the outstanding payments you have left on the report and the loan repayments that have not been made on time. The other factors that affect the score is the high credit utilization and the total credit that you have. If you have been applying for a loan at various banks, all the banks will run a check on the credit report and it gets recorded in the report.
If you don’t want to be offered a high rate of interest on your loan, it is best that you take some time to fix your score and postpone your decision to take a loan. The first thing you need to do is pay off the outstanding credit at the earliest. Check what various banks have to offer to you for your loan and then submit the application. Don’t think that you will be lucky at at least one bank. Pull a credit report before 6 months before applying for the loan and see if the things are in place and you have a decent credit score. Only when you are convinced that the credit score is decent and when you are confident that your application will be accepted, then apply for a loan.
Bank’s will like to have a customer with a good CIBIL score as they will know that the customer is good for the money and they will do anything they can to retain you. A good CIBIL score opens doors for you and is also your ticket to lower interest rates.