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Why Home Loan Closure Adversely Impact CIBIL Score

As i mentioned in my earlier posts that Home Loan is a secured loan and it impacts your CIBIL Score positively i.e. after availaing Home Loan, your CIBIL Score will increase because of its secured nature. Contrary to popular belief, closure of Home Loan negatively impact CIBIL Score. Let’s understand why

Recently i cleared my Home Loan and i was very happy about this fact but this happiness was short lived. As i mentioned in one of my article Home Loan Closure – 5 Important Points that it is very imp to check that your Home Loan account is closed by lender in CIBIL Score database after Home Loan is closed. When i checked my CIBIL score, it was a shocker because my CIBIL score reduced by 12 points after Home Loan Closure. I was expecting improvement in my CIBIL Score as i cleared huge debt of Home Loan.

When i studied in detail, i observed following reasons for drop in CIBIL Score post Home Loan Closure

1.  Question mark on Future Re-Payment Capability:

During Home Loan tenure, we pay regular EMI and it reiterate our re-payment capability every month but after Home Loan Closure CIBIL does not have any secured parameter to check re-payment capability. You must be wondering what about credit card payment. Credit card is un-secured loan/credit and has limited positive impact on CIBIL Score even in case of timely payments but has huge negative impact on CIBIL Score in case of even single default of small amount.

2. Reduced Credit Worthiness:

In laymen term credit worthiness of individual is magnitude of risk which a lender is ready to take on individual i.e. max credit he is willing to offer. Home loan increase credit worthiness many fold but after Home Loan Closure Credit Worthiness is back to square one thus lower the CIBIL Score.

3. Secured Loan in Credit Portfolio:

Any secured loan like Home Loan in credit portfolio improve CIBIL Score thus Home Loan Closure takes away crucial points from CIBIL Score. Personal Loan and Car Loan are unsecured loans and negatively impact CIBIL Score.

4. Lender’s Negative Outlook:

Though last point has nothing to do with CIBIL Score directly but as the Average duration of any Home Loan in India is 7-8 Years and if you are closing your Home Loan much before 8 years then there is a probability that you might face difficulty in availing 2nd Home Loan in future. Reason bank borrow money at a cost and any pre-closure/pre-payment is liability for bank. If money remain idle due to low credit take off then its a loss for bank. Therefore besides CIBIL Score, pre closure of Home Loan too early can impact future credit worthiness despite good CIBIL Score.

In my personal opinion, its better to be debt free as early as possible because of uncertain economic conditions, unstable job market and forced early retirement even if there is slight negative impact on CIBIL Score it’s fine.

Hope you liked this post.

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A Banerjee
A Banerjee
11 years ago

I’m yet to get my CIBIL score after the prepayment of my existing home loan (just paid it 7 days back) and this does surprise me. It shows that system is flawed as its heavily lopsided in the side of the financial institutions.

Nitin Bhatia
Nitin Bhatia
11 years ago
Reply to  A Banerjee

Hi,

You need to apply for CIBIL score either through online or offline mode. Financial institutions take some time to update the details in CIBIL database. It is advisable to pull out score after 1 month from date of clearing the loan.

Thanks

Aniruddha Haval
Aniruddha Haval
10 years ago

I have taken home loan from LIC HFL and Car Loan from HDFC.
I want to
transfer both the loan to my brother account and wish to take new home
loan on my account. will it affect to my cibil score or is there any
disadvantage?

Nitin Bhatia
Nitin Bhatia
10 years ago

If both the assets are in your name than you cannot transfer your loans to your brother. At max your brother can be co-borrower along with you. If your brother becomes co-borrower than also It will not impact your CIBIL score much.

If you are planning to only change bank account from which EMI is deducted than it is not going to help as loan is still in your name only.

Guest
Guest
10 years ago

Hi , I am a nominee director of a company (due to my employment) which has defaulted on bank loans. will this impact my personal credit rating

Nitin Bhatia
Nitin Bhatia
10 years ago
Reply to  Guest

You need to check liabilities of a Director in Memorandum of Association and Articles of Association of Company.

Phani Kumar
Phani Kumar
9 years ago

Hi Nitin ji

My Home Loan ECS have been getting bounced regulary due to LICHFL’s negligence and further errors in ECS presentments, just from the 1st EMI. This is eighth month of EMI to pay. Still LICHFL is working on it. Though the penalties and other charges are being waived off by LICHFL, will my CIBIL Score be impacted? As well does my transaction Bank account collect any charges for this dishonor.

Thanks and Regards

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Phani Kumar

If LICHFL has reported the same to CIBIL then it will definitely impact your CIBIL score. In my opinion, you should pull out your CIBIL score to check the same. If LICHFL has reported in CIBIL then you can request them to correct the same in CIBIL database.

Prima facie, ECS facility is not set up correctly therefore there is no question of penalty from bank. If ECS fail due to low balance then penalty can be levied but in your case due to some issue / error at LICHFL end, ECS is not set up.

Phani Kumar
Phani Kumar
9 years ago
Reply to  Nitin Bhatia

Thankyou Nitin.

It seems ECS is working fine from this moth. As mentioned in your another topic of this blog, I would wait for completion of 2 years fixed interest rate period and check for Transfer of HomeLoan.

Thankyou once again for clarifying my mind drilling questions. :)

Regards
Phani Kumar

Suresh
Suresh
9 years ago

Hi,

I am LIC policy holder from past 2 years and looking for a home loan in LIC. My question is Will they check CIBIL score to give a loan

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Suresh

LICHFL will check the CIBIL score before sanctioning Home Loan.

Suresh
Suresh
9 years ago
Reply to  Nitin Bhatia

Thanks a lot for Clarifying My doubt.One more help Due to some financial problems i have settled 2 credit cards and 1 card is running now CIBIL score is poor.How to improve CIBIL please suggest me.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Suresh

For general suggestions, Please check on posts on how to improve CIBIL score.

prabhav
prabhav
9 years ago

if i have a new credit card and i will pay all the bill on time so how many moth it will take to genrate my cibil score because my cibil score is 0.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  prabhav

It will take at least 6 months..You should use your card regularly & pay on time but don’t cross credit limit beyond 30%.

guest
guest
9 years ago

Hi Nitin
Its great to read your blog , I would request yout o hepl me that i do have a home loan. a car loan. two credit cards. i wanted to buy another home and for the same i wanted to close my home loan.. but going through your blog i am confused please help.. what should i do.. to increase my eligibility

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  guest

Please check following post on Home Loan eligibility
https://www.nitinbhatia.in/home-loan/home-loan-eligibility/

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