Benefits of CIBIL Credit Report to Lenders—and Consumers
Quiz the common man about to whom the CIBIL report is beneficial and you will get “to lenders” as the answer. That’s the prevalent general perception. And like most perceptions, this one too is only partly true.
Yes, CIBIL report is extremely beneficial to lenders, telling them who is a good prospect as a loaner and who isn’t, but it is also beneficial to consumers.
Surprised? Read on to learn more.
Benefit to Lenders
Let’s start with what most of us know—that CIBIL report helps lenders make better informed decisions related to loan sanction.
But why this is so? Why do banks need to see the CIBIL report?
When we hire an employee, for example, a maid, we usually ask him or her to furnish some references. A reference from a third-party, although doesn’t guarantee a display of good character in future, is a proof of a good track record up till now.
This is exactly what banks and lenders do when they pull up your CIBIL report: they seek third party reference from other lenders about your credit repayment history. A good report shows a track record of a healthy repayment history, exactly the thing banks want to see in people to whom they are going to lend lakhs of rupees.
Different loans carry different degrees of risk for the lender; that’s why due diligence carried on some loans is more extensive than on others. However, on all loans, banks carry some amount of due diligence.
Through due diligence, an integral part of which is checking the candidate’s CIBIL credit report, banks are able to reduce their financial loss while extending a loan. The logic is simple yet sound: people with a healthy repayment history are less likely to default in future than people with a poor repayment history.
Benefit to Consumers
“What’s in for us?” ask many lenders.
Well, a lot. What do you think happens when banks are successfully able to lower their risk on loans they give out?
With a lower risk of default, banks can offer a more competitive price to its good customers—the ones with a healthy CIBIL score and lower default risk.
Another benefit of a high CIBIL score is better negotiation power. If your score is extremely good, you can negotiate a lower interest rate on your loan. Over a period of time, even a small reduction means substantial savings.
For example, Ravi Mehta took a home loan of INR 50 lakh for 20 years. Thanks to a CIBIL score of 825, Ravi was able to convince the bank to charge him 10% interest rate instead of the usual 10.5%. In a span of 20 years, this 0.5% drop equals to a saving of INR 4 lakh.
Knowing your CIBIL score allows you to pick up a right time to apply for a credit card or other loans. Most banks don’t offer a credit card if the score is below 700. If your score is slightly lower than 700, you can wait until you bring it up before submitting an application for a new card.