Published date: 08 Feb 2019
Updated on: 06 Apr 2020
Education loan is one of the crucial components when you choose to study abroad. In the present day and age, the cost of higher education is skyrocketing, and hence, a study loan can be your savior, which will help you at every stage of your financial needs during your course. However, to avail of the loan, there are many pre-requisites and the most critical of them is your CIBIL score. In other words, there is a definite relation between your CIBIL score and the education loan, and it is not wrong to say that your credit score is a make or break factor for your study loan.
What is CIBIL?
The CIBIL (Credit Information Bureau (India) Limited) is India’s first Credit Information Company. All the banks and financial institutions in the country are mandated to send credit card payments and loan histories of an individual to CIBIL each month. CIBIL then collects and maintains the Credit Information Report (CIR) to generate the Credit Score.
What is a CIBIL Credit Score?
CIBIL Credit Score or CIBIL Score is a three-digit number that can have any value between 300 and 900. This value is calculated based on the information in your CIR and is an indicator of your credit-worthiness. The lenders use this score during your loan evaluation process. A higher score indicates that you are most likely to repay the loan on time and thus, there are fewer chances of defaulting the credit and hence, you are a less risky borrower. Thus, it increases your chances of getting a loan. On the other hand, a lower score means you are less likely to repay the loan on time and have higher chances of defaulting on the credit and are a riskier borrower. Thus, it lowers your chances to avail of the credit.
How is the CIBIL Score Calculated?
Depending on the CIR report and six month’s historical financial data, the CIBIL algorithm calculates the CIBIL credit score based on 258 different variables each having an appropriate weight. Several factors related to your financial credit history are responsible for deriving your score.
Factors Affecting CIBIL Score:
There is a range of factors that can affect your CIBIL credit score.
- The Applicant’s Repayment History.- The credit score is mostly a reflection of how promptly you have repaid your debt. Any default in the credit card payment or loan repayment will negatively affect the CIBIL score.
- Credit Utilization Limit - Using credit more than the credit limit also negatively affects the CIBIL score. It reflects poor spending habits.
- Length of Time of Using the Credit - In simple terms, it means the total number of years the credit account has been open. Long and positive credit history will help the lender make a quicker decision on the credit application.
- Paying Only the Minimum Amount Due - Chances of falling into a debt trap increase exponentially if you only pay the minimum amount due every month. Interest will keep compounding on the remaining balance. Further, it reflects poorly on the repayment behaviour.
- Credit Mix - it is important to have a healthy mix of secured and unsecured credit. It is looked at by the lenders positively as it shows that you have experience in handling both types of credit. Furthermore, having only one type of credit can affect your credit score negatively.
What Should Be the CIBIL Score To Apply For An Education Loan?
One of the most prominent factors in an education loan is the CIBIL score of the applicant and the co-applicant. The score can range from 1 - 999. However, the ideal CIBIL score to get an education is 750 and above. Applicants with a CIBIL score below 600 would face difficulty in getting loan approval.
How Does CIBIL Score Affect Your Education Loan?
Statistics show that on average, 90% of the loans are granted for the applicants with a score above 750. The higher the score, the higher is the probability of getting your loan approved and a study loan is no exception to this rule. Having a good credit score has its perks that include:
- The lower rate of interest
- Quicker approval with less documentation
- Higher loan amount
- Higher card limit
- Longer tenure
Thus, needless to say, when it comes to education loans, it is a crucial factor in the loan approval process.
The majority of the students might not have taken a loan or credit card in the past and thus don’t have any credit history. In such cases, when they apply for an education loan, the lender checks the credit history of the guarantors who usually are, their parents. Thus, if the parents have a poor CIBIL score, there are high chances that the loan can be denied.
How To Get a Student Loan With a Low CIBIL Score?
It is difficult to get an education loan with a low CIBIL score but not impossible. Follow these tips to get an education loan if your CIBIL score is between 600 to 700 - /
- Timely Repayment on Current Bills - Having a record of timely payments of your current bills, such as credit cards, EMIs, utility bills, etc., will help in building a good credit score, which will further help in loan approval. So, before applying for a student loan, ensure that you have paid your current bills.
- Showcase Proof of Income - a good income will prove to the lender that the applicant has the ability to repay the loan. Even with a bad credit score, proof of income shows that the borrower is adequately financially stable to repay the loan.
- Apply For the Loan From an NBFC - Banks tend to scrutinize the loan application rigorously. Whereas, NBFCs might relax some policies if the student’s profile is outstanding.
- Apply For a Secured Education Loan - in the case of a secured education loan, credit score becomes a secondary factor. The value of the property pledged is of utmost importance. An applicant with a bad credit score can be approved for a loan if they pledge appropriate collateral.
- Resolve Credit Report Errors - The best method to ensure your bad credit score doesn’t ruin your chances of getting a loan is to resolve the errors. A mistake or an error in the report can also occur. Review your credit report every six months to ensure this doesn’t happen again.
How can you improve your CIBIL score?
If you have a low credit score, you can take the following measures to get it on the right track.
An excellent CIBIL score is imperative for getting an education loan and opening the door to your higher education in an esteemed institute. If you check your credit score and take corrective actions as mentioned above, you can improve your CIBIL score right in time and avail your education loan easily and with low interest as well. Also, there are education financing websites like GyanDhan which are specifically meant to help students avail of the education loans irrespective of their CIBIL score and can help you pursue your study abroad.
- Check your CIR, and CIBIL scores regularly - The first step is to check your CIR and credit score from time to time on the CIBIL website. Sometimes, your CIR might reflect an issue due to some technical error or as a mistake by the bank even when you have not defaulted. If you have a valid point, you should report the issue with CIBIL as soon as possible and get the error rectified.
- Clear the dues well in time – Late payments and defaults are a strict no-no, as they badly affect your score. Thus, make all the payments well within time. It will help improve your score.
- Do not be a guarantor to a less creditworthy individual – If such a person defaults, then it will affect your CIBIL score.
- Prefer a mixture of credit – You should avail of a mix of credits with a higher percentage of secured loans as compared to unsecured loans.
- Avoid utilizing maximum credit card limit – Avoid maxing out your credit cards. It is advisable to use only 40-50% of your available credit limit.
- Do not apply for too many credit cards or loans in a short duration – It will do more harm than good to your credit score as it is considered credit hungry behaviour. If you have a low credit score, neither avail nor enquire for any new credit cards unless you require one as it can impact your credit score negatively. Avoid any purchases like a home, car or bike in the same year. Also, plan for any such purchases over a broader time span. Do not get a new loan to repay earlier loan.
- Consult the experts – You should contact the right source which specializes in student loans. GyanDhan is one such platform specially designed to take care of the high demand for education financing. With several years of experience and expertise in the domain, GyanDhan can help you to get an education loan even if your CIBIL score is on the lower side. You can check your loan eligibility and request a callback for further inquiry.
- Avail loans from NBFC – NBFCs (Non-banking Financial Companies) are more lenient towards credit scores and have offered loans to individuals having as low a CIBIL score as 650. One downside of it is they charge comparatively higher interest rates.
- Collateral Loans – In case of a low score, valid collateral in the form of a property can help you to get your loan approved. Loan protector policies are also accepted as collateral in some banks.
- A loan from P2P Websites – P2P (peer-to-peer) lending websites also offer a collateral-free loan for up to Rs. 5 Lakh. Such loans have tenure up to 36 months and charge 12-24% interest. In the case of having a low credit score, it can also be an option for you.
What are Some Other Reasons For An Education Loan Rejection?
Apart from a low CIBIL score, there are other factors that might result in a loan rejection -
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Type & Value of the Collateral Offered - Lenders, especially banks, have a set list of collateral that is accepted for a student loan. The value of the collateral should also be equal to or more than the loan amount required.
This is a companion discussion topic for the original entry at https://www.gyandhan.com/blogs/get-an-education-loan-with-low-cibil-score