It can be difficult to avail a loan with a poor credit rating. Lenders do not want to risk giving loans to customers who have already demonstrated poor credit behavior and might possibly default on EMI payments. However, each lender has a different set of requirements and criteria for sanctioning loans.
So, it is possible that even if multiple lenders reject you, you might have a small chance to qualify with a particular lender who has different set of eligibility criteria. One of the very frequent questions that our customers at CreditMantri have for us is:
I need a 6 months loan, but I have a poor credit rating. What are my options?
Generally, if you have a credit score below 600, it can get difficult to get approved for a loan by traditional lenders like banks. However, we bring to you various options that are available for individuals with a poor credit score.
If you are in urgent need of a loan, then securing a loan against gold would be a good choice. The documentation required is very limited and these are generally short-term loans. Following are reasons why securing a gold loan is advantageous:
• It is quick. You can literally walk in to your nearest lender's branch with your gold ornaments or coins and walk out with the loan disbursement.
• Simple documentation process. Most gold loans don't require any extensive documentation.
• Attractive interest rates. Special rates are offered for existing customers.
• It is safe and secure. Your gold is valued and sealed in your presence to ensure your gold is secure in the lender's safety vault.
• Gold loans have lower interest rates than a personal loan or credit card loan, so your monthly outflow is lower as compared to various other forms of credit.
• You can qualify for a gold loan even with poor credit, since your gold is held as collateral by the bank/lender
Additional Reading: How can gold loans help you improve your credit score?
Loans Against Fixed Deposits
Loans against fixed deposits are another option which can be explored if you have a bad credit score. As you are borrowing against the safety of your fixed deposit, your credit score is not given importance. Generally, a Loan to Value of 70-80% is allowed, which means that a loan amount of 70-80% of your fixed deposit will be given to you. An interest of 1-2% above your fixed interest rate is also charged.
Other advantages available on a loan against fixed deposit are:
Minimum documentation is required for loans against FDs
Your Fixed Deposit continues to earn interest
Poor credit score or no credit score doesn't matter for these loans
Regular repayment can help you bring up your credit score
Shorter loans are allowed under this option
Personal Loans with NBFCs or Co-operative Banks
Personal loans may be hard to come by from a bank, as they follow strict criteria for allowing them. You may, of course, approach the Non-Banking Financial Institutions or Co-operative Banks for personal loans. As it is for a short period, you may be approved a personal loan even with bad credit. However, be prepared to pay a higher percentage of interest when you borrow from these organizations.
These are modern day lenders that do not follow only credit score as the prime criteria for lending. These lenders utilize their own proprietary algorithms and software that uses various parameters other than credit score to make their lending decisions. Moreover, their processes are all online saving you the time needed to make personal visits to banks or other financial institutions.
The need for documentation is also minimum often limited to your salary/ income documents or bank statement and basic identity documents. An added advantage being, the various forms of fintech short term loans that are available.
Pay Day Loans: There is always a cash crunch at the end of the month just before your salary is credited. Lender like Early Salary just aim to reduce that hardship by allowing you a Salary Advance at very minimal rates of interest that comes up to just about Rs 9 per day. There is no foreclosure charge and you pay only for the number of days of usage unlike a personal loan availed from banks, where foreclosure or prepayment is not allowed before completion of a certain term of repayment.
Short-Term Loans: There are many options available for short term loans available from fintech lenders. These loans are not limited as personal loans but can be available for second-hand cars, purchase of durable goods, etc. The process of approval is fast and the need for documentation is limited.
Line of Credit: Similar to line of credit that is available to businesses, individuals can now avail a line of credit from fintech lenders. This option works very well for those individuals who cannot predict the exact amount required, like in a medical emergency. They can apply for a maximum amount of credit that is available according to their financial ability but can choose to withdraw as much is needed and pay interest only on that amount.
Most lenders in India offer loans that have a tenure of 1 to 5 years. If you require 6 months' loan, then you could perhaps try non-traditional online lending sources to fulfill your needs. Peer-to-peer lending is the practice of lending money to individuals or businesses through online marketplaces that match lenders directly with borrowers. While popular abroad, peer-to-peer lending is still in a nascent stage in India.
Use the internet to your advantage and find a reliable lender who might be willing to lend to without a credit check. A basic search would yield the result of several peer-to-peer lending companies. You have to do your due diligence before applying for this option.
If you have bad credit score, it is wise to take steps to improve your credit record right away. While getting a loan with poor credit is not entirely impossible, you might be most probably offered unattractive terms which might make repayment more difficult and expensive.