Why Lenders hesitate to provide loans if you have a low credit score?

Anyone seeking to apply for a loan knows that they have to fill the required forms and also submit the required documents to the lender to initiate the loan application process. Loans are sanctioned only if the applicant meets the eligibility conditions as laid down by the lender. However, before the documents are scrutinized a crucial hurdle needs to be crossed for the application to go to the next stage. The credit report of all applicants is scrutinized and if that is as per what is acceptable to the lender then only the application goes to the next stage.

Importance of credit score in loan application scrutiny? As we said above credit report scrutiny is the first step in the loan approval process, this explains the importance of credit score in the application scrutiny process. Any lender will like to make sure that the money that they extend as a loan is returned on time and in a disciplined manner, for this, they try and ascertain the creditworthiness of the applicant which is done by looking at his/her credit report. Generally, a score above 700 is considered to be an acceptable score if someone is seeking to get a loan approved. Apart from that the lenders also look at the credit report to get a detailed insight into the credit behavior, history, and overall credit position of the applicant.

The credit report consists of various aspects related to the loans and also credit cards that a person has. Five parameters which are namely repayment history, credit utilization, loan tenure, credit mix, and credit inquiries are used to calculate the credit rating which reflects if the person has been a responsible borrower in the past and also what is the overall current debt position. This information gives the lender comprehensive information about the applicant and his credit history which helps them in deciding whether the application must be accepted or not.

Why lenders hesitate to lend in case of a low score? A low score could indicate many things but broadly it indicates that the applicant is a high-risk candidate which makes him/her likely to default more than a person with a good score. As we said above that lenders would like to ensure that the money that they lend is returned to them so if someone is a high-risk candidate then they would like to avoid lending to such a person.

Getting a loan for a low CIBIL score is difficult if not impossible, to say the least. A low score could indicate one or more of the following about the applicant:

Irresponsible borrower: The credit score of an applicant may be low because he or she is an irresponsible borrower. If someone regularly fails to pay their dues on time, misses payments, or is always maxing their credit cards then this indicates that they are not a responsible borrower and the lender is likely to reject their loan application.

Willful defaulter: Sometimes borrowers may default on their payments not because they are suffering from a cash crunch but because they do not have the intention of repaying. This could be indicated by the fact that there are long overdue credit card bills, loans that have been settled, or appear as NPAs in the report. Obviously, the lender does not want to sanction a loan to such an applicant especially so in the case of unsecured loans like personal loans or education loans where there is no asset backing them.

Credit hungry: Lenders want to avoid lending to those applicants who appear to be credit hungry. Credit hungry behavior could lead them into falling into a debt trap or taking too much debt which they may ultimately find it difficult to repay. This will be evident from the credit report if there are too many credit inquiries or there is a high credit utilization ratio regularly. This would obviously make the applicant a high-risk one and the lenders would like to steer clear from such applicants.

Being credit healthy is important not only from the aspect of taking loans but also because it is an indicator of the overall financial health of a person.

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