Is it Possible to Get A Personal Loan with a Low Credit Score?

Is it Possible to Get A Personal Loan with a Low Credit Score?

When a borrower applies for a loan, the first thing the loan provider checks is their credit score. This score is based on the borrower’s credit history and helps know about the individual’s credit history, including the credit amount they have availed and their repayment. Since Personal Loans are unsecured or collateral-free, NBFCs evaluate an applicant’s risk proposition with their credit score. While the general notion is that people with low credit do not qualify for a Personal Loan, the truth is that many NBFCs offer Personal Loans for low credit score holders with different terms and conditions. Below, you will find out how to make it possible.

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What is a Credit Score?

A 3-digit number is associated with the borrower’s past credit behaviour and tells the loan provider how responsible they are with their credit cards and loans. The credit score is a prime parameter used to determine loan approval. Several NBFCs recognise it as an authority to asses the borrower’s credibility.

How Does Credit Score Work?

Credit scores are assigned by credit bureaus such as Experian and CIBIL. They calculate the credit score based on the credit-related information that credit companies provide. An individual receives a score between 300 and 900 as per their past credit history. This information includes the collection of repayments towards different credit lines.

Is it Possible to Get A Personal Loan with a Low Credit Score?

When the individual makes all payments on time, they have a decent credit score. However, when they skip or fail to make the payments, it could reduce their credit rating, making it difficult to get loan approvals in the future. Credit bureaus also include credit card bill payments, which means that paying them off improves the credit rating gradually.

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Does a Low Credit Score Mean Loan Rejections?

When an individual’s credit score is low, they may find it challenging to get a Personal Loan. However, a low credit score is not the end for you. You can take a few necessary steps to improve your credit score over time. Some practical tips have been listed below.

  • Those with outstanding balances on credit cards should pay them back as soon as possible.
  • People with bad credit scores should avoid borrowing. Doing that will give some time to recover from the current debt.
  • When you have a low credit score due to no credit history, get a loan and repay its EMIs timely.
  • While using credit cards, use a small portion of the available credit limit.
  • Those who don’t qualify for a credit card or loan should take a credit card against their fixed deposits. Doing that is an effective way to enter the credit system and build a credit history.
  • When a loan provider has recently rejected your loan or credit card application, avoid making any further loan applications.

These steps may develop the credit score over time. However, when you need an immediate loan without waiting, here are a few ways to get Personal Loans with a low credit score.

Check the Credit Report

The credit report needs to include the latest credit updates. Your credit score might be low due to discrepancies in the report. Therefore, make it a habit to regularly check the credit report and request rectifications for any errors.

Apply For A Joint Loan

Co-applying for a Personal Loan with a co-applicant who has a high score and decent income improves the chances of getting easier loan approval.

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Get a Guarantor

Finance companies perceive low-score individuals as high-risk borrowers. When you apply for a loan with a guarantor, the loan provider feels confident in lending you money. When you default on the loan, they can approach the guarantor for repayment. Therefore, get a guarantor for your loan application to get easy approval. However, ensure timely repayments and don’t leave the guarantor with a loan they never borrowed.

Furnish an Income Proof

Show evidence of a high-income job, steady cash flow, and additional income sources to increase loan approval chances. A low credit score matters little when you have a high repayment capacity.

Apply for a Smaller Loan Amount

Loan providers are less reluctant to sanction Personal Loans for low credit score when the loan amount is smaller. A bigger loan involves a higher risk profile from the loan provider’s perspective.

NA or NH in the Credit Report

An NA (Not Applicable) or NH (No History) is displayed in the credit report when the applicant doesn’t have a credit score. Take a small loan or buy something on EMIs to start your credit journey.

These measures help avail Personal Loans with a low credit score. Ensure timely payments and a robust repayment plan to avoid low credit scores and make loan approval easier in the future. Use a Personal Loan EMI calculator to know the EMIs well and plan the repayment accordingly.

Why do NBFCs Check Credit scores?

Financial institutions check credit scores for multiple reasons. They have been listed below.

  • Understand Applicant’s Credit Repayment Habits: Using a credit score, an NBFC can know an individual’s previous credit-related repayment habits. Those who have repeatedly missed EMIs and credit card bills in the past do not reflect good credit behaviour.
  • Know their Repayment Capacity: Lending institutions want to differentiate between low-risk and high-risk borrowers before approving a loan. An Experian credit score of 630 or above indicates a lower risk with sound financial discipline and repayment capacity.
  • To Determine the Loan Amount and Interest Rate: Once the NBFC realises an applicant’s credit score, they determine their loan amount and interest rate. Individuals with a high credit score can access bigger loan amounts with lower interest rates.
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Author Bio
Prince Namdev has over ten years of experience in the areas of credit, personal loans, business loans, SMEs,s and financing. He has a wide range of exposure in fintech, SaaS, banking, insurance, and financing. He has successfully delivered multiple projects on go-to- financial strategy, analysis, business expansion, and others. He loves to help others to get better financial stability and standards.

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