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A personal loan is an unsecured loan which can be used for any purpose that the borrower requires. There is no collateral or guarantor required to get a personal loan. It is because of this that banks are very strict about who gets the loan approved. The risk for the bank is very high and thus the slightly higher interest rate and stringent approval rates. A the credit score is very important as the lenders first look at it before moving ahead with the approval process.

How to get personal loan for bad credit?

What is a credit score and why is it important?

A credit score is a cumulative number or an aggregate based on all the loans and repayments that you have done. It takes into consideration the loan you have taken and how regular you have been on your payment. The reason credit report and credit score are given so much importance is because it determines most of the attributes of a loan – Interest rate, tenure, loan amount etc.

So, if you have missed or have late payments on your credit report, then your score will be low. Banks generally prefer people with a credit score of 750 as an ideal borrower. Anything below that your rate of interest(increase), loan amount(decrease) and tenure(decrease) will get affected.

Mistakes people make that affects their score

Many do not realize the importance of having a good credit score until they apply for a loan and get rejected. Following are some of the common reasons why you might have a bad credit score:

  • Not paying EMIs or loan installments on time
  • A consistent history of delayed credit card payments.
  • Applying for credit (loans or credit cards) with multiple lenders within a short period of time
  • Getting close to or crossing your total credit limit

Try to improve your credit score to at least 700 and above in order for your loan application to be accepted. Any rejection will hurt your credit score even further.

How to improve and get personal loans for bad credit

From the first two questions you can see that it is a vicious cycle where – you need a good credit score to get personal loans and credit cards but once you have a bad credit score it is very difficult to get one. It becomes even more bad as the only way you can improve your credit score is by paying your dues continuously and meticulously. You might be thinking that there is no way out of this cycle.

Personal loan options for defaulters

The ideal option for anyone with bad credit score is to pledge a collateral to get a good loan deal. With the collateral they can ask for better interest rates. These are called secured loans.

But if you are looking for unsecured loans i.e. not fronting any collateral then you need to have good income from reputed company – If you have a very good income and working in a very good company and for at least 2 years then you will be eligible for a loan.

The biggest challenge you will face is that you will get unattractive interest rates. Banks consider the risks in giving you an unsecured loan and will demand a higher interest rate. In some cases, the banks may reduce the loan amount. For example, if in normal circumstances your amount eligibility for a home loan is around 80% to 90% but because of bad credit score you will probably get only 65% to 70%.

Your loan tenure will also be shorter as banks will look to collect the loan as quickly as possible.

There are 2 options apart from banks that a person with bad credit can try.

1. NBFC – There are some NBFC who provide loans for people with bad credit. They will charge a little bit higher interest rate.

2. Peer to peer(P2P) – There are some website offering peer to peer(P2P) loans up to a maximum of 5 lakhs for tenures ranging from 12 – 36 months.

How to improve your credit score faster

If you have any unpaid dues or have “settled” or “written off” statements on your credit report it is best to pay them off and get the “closed” statements against these accounts. This will improve your score immediately.

Many lenders nowadays provide score building credit. It can be a personal loan or a credit card. These products are either short term or don’t give big benefits or risk for the lender. These products help the individual with no credit score get on the score board which will help when they really need credit for an important reason.

A person can also go for secured credit where you will need to pledge a collateral like fixed deposit to acquire the product. For example, a person can go for a secured credit card where they can post a collateral in the form of a Fixed Deposit of Rs.1,00,000. Now there are 3 advantages for the customer. The first is that the bank will pay interest on the fixed deposit. The second is that the customer will be able to get a credit card with all the benefits and lower interest rate available to the card when you can get it without any collateral. You will only have a credit limit of Rs.60,000 as card issuers only allow 60% to 70% of the collateral as credit limit. But the overall advantage a person gets from secured credit card is high.

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