Unexpected and unplanned expenses arise from time to time, and unless you have emergency funds to cover these expenses, the only option is to avail a Personal Loan. Depending on your credit score, taking a personal loan is easier said than done. Having a low credit score makes it extremely difficult for the loan application to be approved, as the bank sees the applicant as a high risk individual who could default on payments.
What is a good and bad credit score? How to get Personal Loan with low Credit Score? In this article, we shall take a look at these questions and try to answer them.
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Credit Score helps gauge creditworthiness and the repayment ability of the borrower. There are various Credit Information Companies in India like Credit Information Bureau India Limited (CIBIL), Equifax India, and Experian India that gather information on an individual’s financial history such as borrowings, repayments and so on and rate the individual based on that information. Each company uses a slightly different scale, and what makes a good or bad credit score also varies, but the generally accepted format ranges between 300 and 900. The score is generally divided into these risk categories:
Score 750 to 900 à Good
650 to 750 à Average
550 to 650 à Bad
300 to 550 à Poor
Having a bad credit score makes the individual a high risk proposition for the bank. Lenders avoid extending credit to high risk individuals for fear that they will default in repayments. A bad credit score means the person has defaulted in payments in the past, missed bill payments, or a loan application was rejected. Having no credit score is also viewed by many lenders as risky as they have no way of knowing if you will repay the loan or not.
Having a bad credit score is not the end of the road as far as availing a Personal Loan is concerned. There are options available for people with low credit scores, to meet emergency cash requirement.
Non-Banking Financial Companies (NBFCs) provide loans and are lenient on eligibility criteria, so even a slightly lower credit score can be overlooked. Creditworthiness is not a strict criterion for NBFCs and hence, it is not very difficult to get a loan from them, albeit at higher interest vis-a-vis banks.
Secured Loans require collateral to be given to the lender before availing the loan. The collateral acts as a security to the lender and reduces the risk of default by the borrower. In case of default, the lender has the right to confiscate the asset and recover dues by auctioning them. As the lender is in a safe position, creditworthiness may not be as a big factor while availing the loan, making it easier for people with a low credit score to get the personal loan.
Even though you have a low credit score, you may know someone who has a good score and is willing to be a guarantor or co-signer to the loan. Having a guarantor or co-signer is basically having a trusted person vouch for you. In the event that you fail to do so, the lender can recover the dues from the guarantor or co-signer. As the lender is getting an assurance from the guarantor that the loan will be repaid, there won’t be hesitation in granting the loan. This could be a real easy way of getting that personal loan sanctioned.
Convince the officer that you are capable of repaying the loan within the stipulated time. Providing supporting documents like balance statements, employment certificate showing a secure job and steady income, can support your claim. If you can show that you have been working for the same company or employer for a long time, the officer is confident that your employment is secure. If the credit score is low, gaining the trust of the lender by providing assurance is a good option.
As a last ditch effort, you can get loans from less heard of sources to meet the emergency. Credit Unions extend loans to members to help them out of financial difficulty. Their main intention is to serve members, so they can be supportive, but you need to be a member to make use of their services.
Peer to peer lending is a financial innovation where borrowers can avail unsecured personal loans from investors who are looking to earn high returns from investments. Online platforms, registered with The Reserve Bank of India (RBI), connect the borrower and lender, and provide the lender with details on the borrower, so he can decide whether to lend or not.
Family and friends are another option that can be considered for availing a personal loan, when you have a low credit rating.
What better way to increase the chances of getting a loan than to increase credit score? If the loan requirement is not an emergency and can wait a few weeks or months, the best course of action would be to use this time to bring up the credit score. The changes will reflect in your credit score in a few months, and even before that, the steps taken can be pointed out to the lender. Credit Score can be brought up by making regular payments on existing loans, credit card bills, low credit utilization ratio and so on.
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