An individual who needs a personal loan has to first check his credit score as a first step. A credit score is a score of one’s credit history, the amount of credit availed by the individual, his repayment abilities, etc. Since personal loans are collateral-free or unsecured loans, lenders will evaluate if lending to the borrower would be a risky proposition and a credit score will help them determine the same. It is a general notion that people with low credit scores cannot get a personal loan, however, the truth is that many lenders offer personal loans for people with low credit scores.

What is Credit Score and How Does it Work?

Lenders and other financial institutions get to know your creditworthiness via credit or CIBIL (Credit Information Bureau Limited) score. It is a number that is associated with you and tells the bank how responsible you are with your loans and credit cards. The CIBIL score is one of the prime parameters used to determine the approval of a loan. The CIBIL score was India’s first-ever credit rating system and is recognised by all the banks as an authority on an individual's credit rating.

The way the credit score system works is similar to the credit score systems found in many countries. You are assigned a score, a number, between 300 and 900. The number that you get is a result of the information that the banks forward to CIBIL. This information is a collection of your repayments of Personal Loans, home loans, vehicle loans and credit cards. If all your payments are made on time, then you can hope to have a good score. If you skip payments or fail to pay the credit back in time, it could lower your credit rating which would, over time, would make it difficult for you to get approved for a loan. CIBIL also includes utility bill payments which means that your score could improve or deteriorate depending on when you pay your phone, electricity or water bills.

Factors that Affect Credit Score

Since credit scores are supposed to be an indicator of your financial habits, the score changes based on how you handle your loans and credit cards. Here are some of the factors that can hurt your credit score.

  • Personal loans - Since personal loans are unsecured loans, taking too many personal loans can cause your credit score to fall.

  • Missing loan instalments - If you miss an instalment on your loan then it may be viewed as poor financial planning which means that your credit rating will suffer making it difficult for you to secure loans in the future.

  • Coming too close to the limit on credit cards - If you are too close to the limit of your credit cards too often, it too points at constant debt and an inability to manage money wisely leading to a reduction of your credit score.

  • Not paying credit cards back on time - Just like the EMI for your loans, if you fail to pay your credit card dues on time, they too can hurt your credit history.

  • Not paying credit cards in full - You might think that paying just the minimum due on the card or slightly more than that is enough to keep things under control but it's not. While the banks may not be overly concerned that you have an outstanding balance, CIBIL, on the other hand, takes it as a negative sign. For CIBIL, outstanding balance is not a good thing and tends to lower your scores.

  • Not having any credit at all - It may sound like a good place to be in if you don't have any loans or credit cards at all when in fact it is not. This is so because not having a credit history means that your credit score is 0 by default which means that if you were to apply for a loan or a credit card, the chances of it getting rejected are higher.

  • Too many rejected applications for loans/credit cards - If you apply for a loan or a credit card and your application is rejected, you tend to apply with another bank, and another and so on. Such practices reduce your score for two reasons. The first is that CIBIL takes constant rejects to be a bad sign and secondly because every time a bank requests CIBIL for your credit information, your credit scores come down.

  • Settling credit cards - If you have settled credit cards, that is, if you have negotiated with the bank and closed a credit card after paying an amount lesser than what was due on the card, then your credit history will receive a red flag that could cause trouble later.

Getting Personal Loan with Low Credit Score

If you have a poor credit score, it is advisable to wait a few months and try to improve the credit score and apply again when the score has improved. If you have multiple debts or loans, your credit score will be low. So, payout some of these loans. Make sure your EMIs and credit card bills are paid on time.

In case you have a dire necessity, there are options available to individuals with low CIBIL Score. There are some banks and financial institutions that offer personal loans for low CIBIL Score. Look for such lenders.

A bank may refuse to give you a personal loan, in which case, you may consider approaching a non-banking financial company. These companies offer loans to low credit score individuals. The rate of interest, however, is much higher in such cases. Your negotiation capacity is also limited if you have a poor credit score but try to bring the interest rate down. If you are having trouble getting a personal loan, you can also consider a loan against collateral. Instead of an unsecured loan, you may be more successful finding a secured loan against a property or asset collateral.

Try looking for a guarantor within the family who has a good credit score. The guarantor will act as an assurance to the bank that you will not default on the loan. Another option is to go for a joint loan with someone who has a good CIBIL Score. It could be a spouse or any other family member.

End Note

Credit scores are easily available online. You can get your credit score using the calculator tool available on the website of CIBIL credit ratings. Apart from CIBIL, several aggregator websites also offer to calculate the credit score for you. Not having a credit score may adversely affect your loan application. If you have a credit score it becomes easier for the bank to evaluate your creditworthiness.