There might be many reasons as to why you need a personal loan. Whether it is an emergency or an unplanned expense, a personal loan is our immediate choice to address our cash flow needs. However, if you don’t have a favorable credit score, you might face some issues while applying for a personal loan.
While the common misconception seems to be that you cannot get a personal loan with a low credit score, so is not the case. It is possible to get a personal loan even with a low credit score.
What is a Credit Score?
A credit score or CIBIL score is your creditworthiness. It is measured by the RBI mandated Credit Information Bureau (India) Ltd (CIBIL). The CIBIL score ranges from 300-900, and the closer you are to 900, the more your creditworthiness.
The score is calculated on how you have handled your existing debts like loan and credit card repayments. When you repay your bills on time, it reflects positively on the CIBIL score, and defaulting on them lowers the score.
The banks consider the trinity of job, bank balance, and credit score when sanctioning any loan, including personal loans.
Most banks look for an ideal score of 750 or more for approving a personal loan to an individual. You also get the added advantage of negotiating interest rates, repayment tenure, and so on with a high score.
What Causes a Low Credit Score?
Many factors can cause low credit scores, for example:
- One of the significant factors that influence your credit score is the record of your past payments.
- The consistency and default in payments are taken into consideration. In case of delays, your credit score will get affected.
- If you have recently finished writing-off a loan, your credit score will be low. At the same time, too many loan settlements can affect your credit score even more.
- Multiple transfers of your existing loan from one bank or financial institution to another can also affect your credit score.
- Most banks rely on the income against the present loan ratio to determine your credit score. The higher the ratio, the higher the chances of approval and vice versa.
Guide to Get a Personal Loan with a Low Credit Score?
You can try these tips to get a personal loan even when you have a low credit score.
Understand Your Credit Report
Nowadays, there are many ways to check your credit score, as many websites offer free credit report downloads. Reviewing your credit report and score can help you in understanding the lender’s perspective. In case of a low credit score, you still might get a loan but with higher interest rates and lower amounts.
Moreover, you also need to watch out for any possible errors in your CIBIL reports. This scenario usually occurs when your CIBIL report is not up-to-date. In case of any discrepancies, get them corrected immediately.
Prove that You Can Pay the EMI’s
If you have received a raise in your current salary or have an additional income, the lender might consider approving your loan. If you can convince your lender that you are capable of making the EMI payments on time with appropriate records, the lender might grant you the personal loan despite the low credit score. You can also request a lower amount that a lender might be more comfortable approving, as it is easier to repay as well.
Reduce Your Credit Card Usage
Your credit card activity also plays a vital role in determining your credit score. Usually, every credit card comes with the prescribed limit. The more you utilize and charge your credit card, the more your credit score goes down. Ideally, having a 30% utilization ratio on your credit cards is beneficial for maintaining a good credit score.
At the same time, defaulting on your credit card repayments also plummets your credit score. Try reducing your credit card usage and make payments on time before applying for a personal loan. Also, don’t avail any credit card loans either as they will significantly reduce your chances of availing a personal loan.
Get a Guarantor or co-Applicant
When applying for a personal loan with a low credit score, you can enlist the support of a guarantor or co-applicant for the easier approval of the loan. But, you need to ensure that the guarantor or co-applicant is on board, and have completed their KYC formalities beforehand. The main benefit here is that if your guarantor or co-applicant has a good credit score or a stable income, you have a higher chance of getting the loan.
Sometimes, the reason for you not getting the personal loan might be due to an NA (Not Available) or NH (No History) rating. The rating NA means that there is an absence of credit activity for the last three years or so: while the NH rating indicates that there is no credit history for the individual.
In both cases, you can speak with your lender and obtain a personal loan with a slightly higher interest rate. The bank will take into consideration certain factors such as your age, income, and job stability, and so on to calculate your creditworthiness. Above all, you need to be extra sure that you have sufficient bank balance to cover your loan repayments. If not, your score will go down further.
In case you are unable to get a personal loan with a low credit score with banks, you can try these alternatives:
- You can offer collateral like your assets or gold jewelry and secure a loan. You have higher chances of getting a secured loan as opposed to the approval of an unsecured loan.
- You can approach Non-Banking Financial Companies(NBFC’s) as they offer personal loans to individuals with a low credit score.
- Sometimes, your employer may have tie-ups with financial institutions, both NBFC and Banks. You can avail of the loan from them as the eligibility conditions might be relaxed when compared to the usual process of personal loan approval.
A good CIBIL score is a must for getting a personal loan, but you can obtain a personal loan with a low credit score by following the above-detailed ways. However, ensure that you check your credit score regularly and that it becomes your advantage when applying for loans instead of being a deterrent.