Personal Loan For Low Credit Score

What is a credit score?

A credit score is a universally accepted barometer of your credit health. It is a numerical calculation of your financial position which gives the lenders definite criteria to determine how you have handled your past loans and whether you are in a position to repay your loan if granted in future.

The range of credit score lies somewhere from 300-850. Any credit score above 700 is considered good. The credit score in the range of 400-500 is considered low. If your credit score is in the range of 600-700, you are eligible to apply for a loan.

There are a number of factors that influence your credit score. The major reasons why you could have a low credit score are :

• If you have too many personal loans, it can raise a question whether you can timely repay all of them. This can lower your credit score.
• If you have ever missed a loan instalment, this can be viewed as your inability to plan your finances properly. This will lower your credit score and make it difficult for you to apply for loans in the future.
• Credit utilization ratio is a big factor in determining your credit score. If your spending habits always take to the upper limit of your credit card, it has a negative impact on your credit score. You will be viewed as a reckless spender who doesn’t know how to plan the finances.
• Similar to EMI on other loans, if you fail to meet your credit card commitments on time, it will have a negative impact on your credit score.
• If you think that by avoiding credit cards altogether, you can maintain a good credit score, you are wrong. The absence of a credit card means you have no credit history, which automatically makes your credit score as zero. If you apply for a personal loan as a primary applicant, you may face rejection.
•  If you face rejection on your loan application more than once, you may be prompted to apply for the same loan to newer banks. If you make this a constant practice, it can pull your credit score down. This is because repeated rejection is bad for your credit score, and each time your prospective lender requests your credit information, it will adversely impact your credit score by default.

This brings us to the pertinent question, why does a lender refuse you a personal loan if you have a low credit score? There is a serious reason behind this. The lenders do not want bad debts on their books. If they grant loans to borrowers with a low credit score, there are chances that they default on their loans. This is a risk for the lenders and they also lose a lot of money in the process.

If your credit score is found to be good, you are immediately granted a loan, but unfortunately, if your credit score is less than desired, the lender will not consider you for a personal loan. But is this the end of the world for you? What if you really require cash for a medical emergency, family wedding or any other sudden expense? Don’t worry. Today, you can avail a personal loan even with a low credit score.

How can I avail for a loan even with a low credit score?

There are certain practical tips which allow you to obtain a loan even with a low credit score. There must be a few factors in your financial profile which are stronger despite a low credit score. You just need to capitalize on that. Mentioned below are some of the smart yet legitimate ways to do that:

• Good earning potential

If you have good earnings now or your earnings potential is good in the future, it shows that you have adequate capacity to repay your loans. This can be instrumental in getting your loan application approved despite a low credit score.

• Get a co-applicant

If your spouse or any other family member has a good credit score, get them on board. You can jointly apply for a loan and this increases your chances of getting your loan approved.

• Settle with a higher rate of interest

There are certain lenders who do offer loans to borrowers with low credit score. In these cases, the loan amount sanctioned is relatively less and the rate of interest is higher. If you are in need of cash for immediate need, you may consider this option. You may also opt for peer-to-peer lending which a popular concept in the West but is also gaining momentum in India.

• Get a loan against a collateral

Even if you have a low credit score, some lenders will sanction your personal loan if you pledge collateral against it. These collaterals include shares, property, Fixed Deposit, Gold and many other assets.

• Start rectifying your credit health

This will take a considerable amount of time but is the best way to avoid loan rejections in the future. You can repay your existing debt, reform your spending habits, maintain a habit to make timely EMI payments, pay your utility bills on time. These are few of the small ways in which your credit health can be restored. As a result, there will good credit score and you will become more eligible for the loans.

What are the documents required when applying for a personal loan for low credit score?

• Driver’s license
• Aadhar Card
• Passport
• Address Proof
• Bank statement for 6 months
• Salary slip for 6 months
• For self-employed professionals/ businessman: Company Registration Information, TIN/ Service Tax registration proof, 3 years profit and loss statement, 3 years balance sheet, and ITR for the past 3 years.

Personal Loan for low credit score may not be easy to obtain but it is not impossible. While leading bankers are mostly very particular about the credit score, there are certain lenders who may be willing to negotiate the credit terms to offer loan to you. You can try different approaches such as negotiating terms with your current lender, borrow against a deposit or take a loan against gold etc. Be sure that the loan you take doesn’t throw your finances off balance. Ensure that you really need the money and once you have obtained the loan, you must be very careful about repaying it timely.

However, it is very important to be cautious of predatory lenders who may use the opportunity to exploit you with an extremely high interest rate or putting forth terms and conditions for their own benefit. There also may be moneylenders from the unregulated sector who will try to impose certain unjustified conditions on you. You must only approach regulated lenders, emphasis on having official documentation in place and agree upon the loan terms mutually. You must also insist on complete transparency on both ends.

Frequently Asked Questions: Personal Loan for Low Credit Score