How to Get a Personal Loan with a Low Credit Score?

February 11, 2022 Mutual Fund

The first thing that the lender checks when you apply for a personal loan is your credit score. As you may be aware, your credit score indicates your creditworthiness and this affects the kind of loan you are eligible for. To approve or reject a loan, especially a personal loan, the banks and NBFCs largely depend on a credit score as it shows your ability to repay the loan. While you might have heard that it is impossible to get a personal loan with a low credit score, the truth is you can get a personal loan with a low credit score. That said, it won’t be easy, you will have to make some extra effort.

What is a Credit Score?

A credit score is a three-digit number ranging from 300 to 900 that depicts an individual’s capacity to repay the loan. Out of many factors that banks and NBFCs consider while approving or rejecting your loan application, your credit score is a major factor since it gives lenders an idea about your creditworthiness. The higher the credit score, banks and NBFCs will be more interested in granting you a loan because a higher credit score indicates a lower probability of loan default. Therefore, a higher credit score is the key to loan approval, whereas a lower credit score reduces your chances of getting a loan.

Your credit score is a reflection of your credit history. If you have been repaying your existing EMIs and credit card bills on time, you will have a good credit score. A credit score above 750 makes you eligible for better offers on your loan application. However, if you have missed a few monthly repayments or made delayed repayments, it will reflect on your credit score. Lenders consider any person with a low credit score as a high-risk individual and might not approve your personal loan application. But that does not mean it is impossible to get a loan with a lower credit score. It will be challenging and if you are ready to make some extra efforts, the lenders may consider your application and offer you a personal loan. Note that, though the lenders may grant you a loan, they might offer a lower loan amount or charge you with a higher rate of interest.

How do I get a Personal Loan with a Low Credit Score?

Here are some tips to get a personal loan with a lower credit score. With these tips, your chances of personal loan approval will increase even if you have a poor credit score, i.e. lower than 550.

1. Correct your credit score:

There could be mistakes when the credit bureau calculates your credit score. Such mistakes are most likely to happen when your recent repayment information is not updated in the records. If you have been making timely repayments recently, but your credit score still hasn’t improved, you should check with the credit bureau and get the data updated. Once you have a good credit score, the lenders will be interested in offering you the loans. However, you should know that defaults in the repayment of loans and credit card bills have a longer impact on your credit score. Hence, before requesting the credit bureau, you should first check which defaults or late repayments are affecting your credit score by analysing your credit report.

2. Show your additional income:

If your credit score is poor, you will have to show the lender proof if you are earning any additional income. You will be required to provide documents of your additional income that you might be earning from your side-hustle or rented property, apart from your main income source. Similarly, you can also show the documentation of your increased income from the main income source like an increment, the latest increased ITR, etc. This will give the lender confidence that you will be in a better position to repay your debts. However, the lender might charge you with a higher rate of interest.

3. Apply for a lower loan amount:

When you apply for a high loan amount with a low credit score, the lender might not be inclined to approve it as they might think you will not be able to make the timely repayments. However, if you apply for a lower loan amount, the lender will consider your loan application as the repayment of small loans can be a lot easier. Moreover, having lower monthly repayments will make it simpler for you to improve your credit score and you can then apply for a higher top-up loan.

4. Apply jointly or with a guarantor:

Suppose you do not have any additional income or need the higher loan amount, which you are not eligible for due to a poor credit score. In such a case, you can look for a co-applicant or a guarantor with a good to excellent credit score. If they agree to be a co-applicant or guarantor, they will have to submit the required KYC and income documents. Having a co-applicant with an excellent credit score will also help you get a better interest rate.

5. Request to consider the absence of credit history:

Having the NA or NH on your credit report indicates the absence of credit history in the last 36 months. In such a case, your credit report will not have a credit score. Although most lenders prefer offering a personal loan to individuals with a good credit history, they can consider your request and offer a personal loan of a smaller amount or a relatively higher rate of interest.

To Conclude:

The tips discussed above will help you get a personal loan despite a low credit score. However, make sure you have sufficient income and surplus funds to repay the loan amount comfortably. Before applying for a personal loan, you should compare the interest rates, processing fees, pre-closure and part-payment charges of different banks and NBFCs as it will make a substantial difference in the total loan outgo. Furthermore, it is advisable to opt for a personal loan only in case of a financial emergency because, since these loans are unsecured, they are comparatively costlier. Having a poor credit score will most likely make you pay an even higher rate of interest on your loan. Hence, if possible, it makes sense to postpone taking the loan and apply when you have a good credit score. Click here to know how you can improve your credit score.

This article first appeared on PersonalFN here