Debt management is a serious task. With so many loan products in the market, it is very easy to fall into the debt trap, but true brilliance is in staying afloat. Defaulting on your loans is not a pleasant experience. A financial emergency could strike at any time unless an emergency fund is ready to deal with it and being a defaulter is not going to help you with getting a loan. While some might be financially prepared, not all might be in the same condition. You may have genuine reasons for defaulting, but it has a long lasting effect on your entire finance portfolio. It damages your credit score and will affect your future loan prospects too, as it is seen as a sign of poor debt management. However, a loan default is not the end of the world. There are various other options for you to secure funds for your emergency needs. One such option is a personal loan, which is not very rigid with its eligibility requirements for applicants. 

Who Is A Defaulter?

A Defaulter is a person who has missed payments on his loan or credit card for more than one billing cycle. Late payments after the due dates are acceptable, but is not a healthy financial habit. Non-payments have serious repercussions on your credit score and can ruin your chances of approval for a loan or credit card, despite having a good income. 

Loans are accepted on the basis of the applicant's creditworthiness. The amount of the loan is also decided on the basis of the credit worthiness of the borrower. Your credit rating is simply an indicator of how good you are with debt. If you have existing loans or credit cards, your credit score will be measured by how often you have repaid those debts and how timely you were in repaying the loan.

A good credit score is essential to avail loans with attractive terms and higher loan amounts. A person with a high credit score is regarded as an ideal candidate for any type of loan, including personal loan. Most banks believe that 750 is a good score. Anything lower than that could result in the cancelling of the loan as candidates with lower credit score are considered high-risk.

The lender considers your repayment ability before authorizing a loan. The credit score as well as job security and bank balance will assess your repayment ability. Banks also take the income to debt ratio against any existing loans into consideration. The better the percentage, the greater the chances of securing a loan. Any high balance of loans will negatively affect your credit score. 

A poor credit score will have a lasting effect on your quality of life by restricting your purchasing power, rather than just imposing rejections, and ultimately affect your living standards. The groups most impacted are the low-income salaried individuals and self-employed workers in particular. 

Why Should Defaulters Choose A Personal Loan?

With a ‘Defaulter’ tag on your credit history, it is pretty much impossible to avail other types of loans. A personal loan too is not easy to come by for defaulters. However, with a personal loan, the borrower has some leverages which, when applied tactically, can help them secure a personal loan. 

Why is personal loan a suitable option for defaulters?

  • Does not require any collateral

  • Can be availed by lower income individuals

  • Less documentation required

  • Quick processing and disbursal

What Should A Defaulter Do To Get A Personal Loan?

There are a few improvements a defaulter can make to secure a personal loan. 

  1. Present a better salary record: If you are currently drawing a better salary from when you defaulted, you can highlight this point to the lender to consider your loan application. An improved repayment capacity increases your chances of securing a personal loan, irrespective of the low credit score. You can also include any additional source of income you now have to prove that your income can now support the EMI payments. If you can convince the lender that you have a stable job and a steady income, despite a poor credit score, they are more likely to grant you the loan. However, if you prove your eligibility in this way, you may have to pay higher interest rates. 

  2. Go for a lower loan amount: Applying for a high amount with a low credit score just poses more risk for the lender. From a lender's point of view, it might mean that you might default on repayment on this loan too. Instead, when you apply for a lower amount of a personal loan, it may be more convincing for a creditor to give you the loan as it is easier to repay a lower amount.

  3. Include a co-applicant with better credit score: You might consider adding your spouse, sibling or parent, with a better credit score, as a co-applicant on your loan application to increases the chances of loan approval. 

  4. Opting for a secured loan: Though personal loans do not ask for any collateral, you can offer some substantial collateral to better your chances of loan approval. You can offer assets like gold, shares & stocks, Govt. bonds, bank FDs, etc, as collateral. 

  5. Present a guarantor for the loan: Again, though personal loans do not require a guarantor, offering one with a good credit standing with the bank will help you in securing the loan. You're going to need to make sure your guarantor has an excellent credit score. However, your guarantor will be held responsible to repay the outstanding balance if you default on this loan too. In case of default on your part, their credit score will also take a hit. Therefore, many are apprehensive about being guarantors of loans.

  6. Increase your income: If you defaulted on previous loans due to insufficient income, find a better source of income. With increased income, your debt to income ratio will be better and you will land a better chance of getting that loan. 

  7. Debt consolidation: Many banks and NBFCs offer loans for debt-consolidation. If you have multiple credit cards or personal loans, there is a high likelihood of going in to a potential default. You can overcome this by taking out a personal debt consolidation loan and steering your repayment to a single source. In addition to helping you prevent a default in the future, it can also help relieve a lot of stress.

  8. Taking a loan from your PPF account: The primary objective of this investment option is retirement planning. However, it allows account holders to apply for a loan during emergencies. One can apply for a loan from the third year up to the sixth year of account opening. Starting from the 7th year, one can partially withdraw from the account. The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for. Interest is charged at 2% more than the interest earned on the balance in the PPF account.

  9. Consider taking a salary advance: A salary advance is a good idea in times of fund crunch. Many employers have this facility to help their employees in times of need. Check with your employer on the guidelines for availing a salary advance and go for it when you are in grave need of funds. 

  10. Online Fintech lenders: Though they are not yet popular in India, Fintechs are surely gaining traction in the Indian financial scene. These online lenders can place funds in your hands in as quick as 1 hour. Their loan application processing is based on new age technology and is not limited to just 1 or 2 parameters like traditional lenders, rather from multiple data sets. Hence, a low credit score might not affect your chances of securing short term loans with these Fintechs. But the interest rate and processing fees on these loans might be a tad bit higher compared to traditional lenders. 

  11. Check your credit score for any errors: Though highly unlikely, errors on your credit score might be resulting in a lower credit score. Before going in for a new loan, get the latest credit report and verified for its correctness. If you find any errors, it is easy to rectify them and thereby improving your credit score. 

  12. Request your lender to consider your credit report with a NA/NH: If you do not have any credit activity in the last 36 months, your credit report can be marked with a NA/NH, which means ‘Not Applicable’ or ‘No History’. If your lender considers this, they might offer you a loan, though with a higher interest rate.

End note: Credit score is important. Low income and middle income group are the most affected by an unhealthy credit score. Take all necessary steps to improve your credit score. Maintaining a good repayment history is important and so is having a good revolving credit. Make sure that your income to debt ratio does not exceed 43%. Have a solid repayment plan in place before applying for loans to avoid another default.