Credit score plays a pivotal role in determining the creditworthiness of a borrower. It is a complex metric arrived at by considering the number of outstanding liabilities, repayment history, income, etc. A credit score is reported as a number from 300 to 900. A borrower with a credit score above 750 is considered as good and likely to get loans when required. Anything below 600 is a bad credit score which is handled with caution and the lender might charge higher interest rates and request collaterals. Here is a snapshot of the ranking of credit scores. 

CREDIT SCORE RANGE	RANKING
750-900	Excellent
700-749	Good
650-699	Fair
600-649	Doubtful
Below 600	Bad

Thinking of applying for a personal loan but your credit score does not meet the lender’s checklist? Here are a few things that you can do to improve your position.

Introducing a Co-applicant

You can try including a co-applicant in your loan application. He/she can be any of your close family members (father, mother, husband, wife, son, daughter, brother, sister) with a stable income and a good credit score. The lender shall consider both of your profiles in assessing the repayment capacity. Joint loans are a safe bet for lenders in case of bad credit scores.

Applying with collaterals

The chances of getting an unsecured loan with a low credit score are very less. Hence you may consider applying for a secured loan. You can pledge your gold, investments, property, etc to qualify for the loan. The lenders wish to go for a secured loan when the credit score is poor as their risk is considerably reduced. They can sell the hypothecated asset in case of payment defaults by the borrower.

You should wait after your application is rejected

Stop applying scrupulously to various lenders if your loan application is rejected. Any rejection in the application shall be reported automatically for recalculating your credit score.  So wait for 3 months at least to make any fresh loan application after the rejection.  You can try improving your credit score in the interim period.

Check your eligibility before the application

Many banks and financial institutions have loan eligibility calculators on their websites. The criteria are fixed as per the bank’s policy. You will be required to give basic inputs like name, age, net monthly income, existing debts, and obligations, existing EMIs, collaterals available, amount of loan required, etc. The calculator can suggest if you are eligible for the loan amount.

Apply with a different lender

Study the interest rates and eligibility requirements of different lenders before applying. Avoid sticking to a particular lender in case of a bad credit score. If you foresee the rejection of your application, try with a different borrower. But it should be done at the initial stages of the application itself.

Apply for a lower amount

The banks may not be able to lend what you ask with a bad credit score.  But you can agree to a lesser amount or an amount you are eligible for with your current credit score.  This will avoid upright rejections and make your credit score adverse.

Take steps to improve your credit score

• Ensure you do not miss any EMI payments and fund your bank account adequately to avoid any ECS cancellation.
• Pay the credit card bills on the date.
• The improvement in your monthly income can boost your repayment capacity and convince the lender to offer what you require.
• Look for government incentives, subsidies, and waivers:
• The government provides various subsidies, incentives, and easy loan access to Micro, Small, and Medium Enterprises (MSME) through various schemes. These are implemented through public sector banks, and small or micro financial institutions. If you have failed in repaying your business loan or you are intending to revive your failing business speak with your banker regarding the government schemes.
• Also, the Government studies sector-specific bad credit loans and provides a consolidated waiver of bad credits. For example, the Government recently waived Rs 10 lakh crores of crop loans. Look out if your bad credit is eligible for any partial or full waiver by the Government. This can help in reviving your credit score as well.

Lenders offering bad credit loans:

Non-Banking Financial Companies (NBFC) like Bajaj Finserv, Tata Capital provide loans to borrowers even with a low credit score. However, the interest rates are high when compared to the normal market rates. If you are looking for an unsecured loan even with a low credit score, the NBFCs may offer a lesser amount of loan with shorter EMI tenure.

Alternative financing like Peer to peer (P2P) lending, Crowdfunding can help borrowers who are not able to get loans from financial institutions. The lenders in P2P lending are individuals who wish to invest their money in loans with verified interest rates. There are platforms like Lendbox, Faircent which have verified borrowers. You can get a maximum loan of Rs 5 lakhs in crowdfunding. The advantage is that you can borrow small amounts from multiple lenders at the same time.

Avoid fly-by-night lenders:

The process of getting a bad credit loan can be harder. There will be spammers who will wait to use your desperation. Don’t fall prey to lenders who offer no-credit-check, no documentation, and no collateral loans. They charge a specific percentage as fees before giving any loan and will just disappear. Instead of getting a loan, you may end up losing your own money.

Conclusion:

A bad credit score isn’t the end of the world. There are always means to make things better.  The cost of getting and repaying a bad credit loan can be higher. Repaying the loans on time is a good financial discipline that helps in improving your credit score and increases the chances of getting the required loan. Bad credit loans are an anchor in the lost seas but proceed with caution.