Loan has become a norm these days; many of us will be familiar with the complete process in applying for a loan and the anxiety during that period waiting for approval. After all, it’s the lender who decides whether we can own our dream home, our first car, education loan.

While other factors do play a part in the lender’s decision the CIBIL Credit Information Report (CIR) plays a crucial role in a lender’s decision to approve a loan application.

Therefore, before commencing your loan hunt it is important to understand the role of credit information and its impact on your financial health.

What is CIBIL?

CIBIL is India’s first Credit Information Company (CIC) that provides credit information to credit institutions and individual consumers. A CIC collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to the CIC by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Report (CIR), which are provided to lenders in order to help evaluate and approve loan applications. CICs are also commonly referred to as “Credit Bureaus”.

The use of CIBIL CIRs is best illustrated with an example. I have a home loan with bank A and a credit card with bank B. Both bank A and B submitted my personal information and payment details to CIBIL. Recently, I applied for an auto loan to bank C. Upon receiving my application, bank C requested CIBIL for my CIR so that it could assess how I have been paying my current dues and whether I will be able to manage the additional burden of another EMI.

One should mention that the bank also requested my Form 16, savings account statements and other identification documents; the CIR has become an often used tool in evaluating loan applications.

What information does a CIBIL CIR contain?

A CIBIL CIR is a month on month record of an individual’s loan-related EMI or credit card payments. Loans can include home loans, credit cards, personal loans, auto-mobile loans and overdraft facilities. Other information includes:

• Personal information related to the individual such as name, date of birth, address and identification numbers like PAN number, passport number, voter number and telephone number
• Account information such as the type of loan taken (home, auto, personal, over draft, etc), the size of the loan, the current balance outstanding, overdue amount (if any), number of days a payment is overdue and so on.
• Information on the number of ‘enquiries’ made by the banks on the individual. An ‘enquiry’ is created on your CIR every time the lender requests the credit bureau for your CIR.

Does CIBIL maintain a defaulter’s list?

No. This is a very common misconception. CIBIL collects all credit information. This includes information pertaining to individuals who are making their payments on time as well as those who are in default.

What does CIR mean for me as an individual?

The biggest change that the advent of CIRs in India brings is making your payment history available to a lender, when you apply for a new credit facility.

So, how does this bring about a big change? Well, previously lenders would treat all loan seekers equally. Each applicant, if approved by the lender’s internal credit policy, would get charged the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all borrowers, in order to compensate for the possible default of a small portion of the loans disbursed.

Today, CIBIL CIRs provide lenders the ability to differentiate between those who have honored their obligations responsibility and those who have defaulted. Individuals who have appropriately manage their obligations build ‘reputational collateral’ with lenders. In turn, this reputational collateral allows individuals to negotiate better terms with a lender.

Hence, prior to commencing your loan hunt, it is advisable to purchase and review your CIBIL CIR. It helps you understand what the lender will review while evaluating your application. Secondly, to identify and rectify any discrepancies that you may find on your CIR and hence, prevent any wrinkles during the loan evaluation process.

Please visit http://www.cibil.com/ for details and documents.