How to get loans for bad credit no guarantor?

The loans that require guarantors for approval are long term or high ticket loans such as education loan for higher education or a home loan that is of a higher amount, although it is a role which helps people who would have otherwise not receive credit it is also a role which comes with its share of liabilities and hence many would not want to be a guarantor.

Getting a loan approved is itself a difficult process. Though the loan application process has been simplified, the banks are still strict when it comes to approving a loan. This is more so in the case of unsecured loans as the lender might run into a risk of defaults. If people with good credit score find it so difficult to get a loan approved, it is next to impossible for people with bad credit score to get any credit.

Most banks will demand some sort of guarantor having good credit score in order to provide unsecured loans for people with bad credit. These people suffer as they do not have access to any traditional sources of unsecured funds from banks or NBFCs when there is an emergency. It is during these times that people with bad credit can look for alternate sources or methods to get loans or credit cards.

What are the options available to a person with bad credit score?

Secured Credit

The ideal option for anyone with bad credit score is to pledge a collateral in the form of gold loan, loan against property and secured credit cards. These types of loans and credit cards are called secured credit where the risk for the bank is minimal.

It might be difficult to get home loans or vehicle loans, but all the other loans are quite possible. Banks will be more lenient with the interest rate here as the risk involved for the bank is less. You will get a loan of 60% to 70% of the collateral value.

Similarly, you can also get secured credit cards which follow the same principle of secured loans. Your credit limit will be 60% to 70% of the collateral pledged. You may think that the benefits of the cards will vary between a secured and unsecured card but that is not the case. In fact, you will get lesser interest than the unsecured credit card. The secured credit cards are generally given against fixed deposits.

Unsecured Credit

If you are looking for unsecured loans i.e. not fronting any collateral, then you need to have good income from reputed company.

The biggest challenge you will face is that you will get unattractive interest rates. Banks consider the risks in giving you an unsecured loan and will demand a higher interest rate. In some cases, the banks may reduce the loan amount. For example, in normal circumstances, your amount eligibility for a home loan could be around 80% to 90%, but you will probably get only 65% to 70% when you have bad credit.

Your loan tenure will also be shorter as banks will look to collect the loan as quickly as possible.

Alternate lending

There are 3 options apart from banks that a person with bad credit can try.

1. NBFC – There are some NBFC who provide loans for people with bad credit. They will charge a little bit higher interest rate.

2. Peer to peer(P2P) – There are some website offering peer to peer(P2P) loans up to a maximum of 5 lakhs for tenures ranging from 12 – 36 months.

3. App based lending - With the booming of digital technology many startups have emerged who provide short term loans based on your salary which is a good way to improve your credit score. These loans tend to have interest rates on the higher side, but it is worth taking if your score is very low and especially if this is your only option.

Mistakes people make that affects their score

Many do not realize the importance of having a good credit score until they apply for a loan and get rejected. Following are some of the common reasons why you might have a bad credit score:

• Not paying EMIs or loan installments on time
• A consistent history of delayed credit card payments.
• Applying for credit (loans or credit cards) with multiple lenders within a short period of time
• Getting close to or crossing your total credit limit

Try to improve your credit score to at least 700 and above in order for your loan application to be accepted. Any rejection will hurt your credit score even further.

5 ways to raise your Credit score

1. Make full and timely payments on bills from TODAY! Your repayment history forms up to 30% of your credit score. Therefore, it is very important to make sure that you have a spotless repayment record starting now, even if you have had defaults in the past. Making full payments on-time will have an immediate positive impact on your credit score.

2. Obtain a copy of your credit report to identify and resolve errors. Sometimes due to administrative errors, a loan that you have paid off in full might still be shown as outstanding. These errors can unnecessarily drag down your score. Filing a dispute and correcting these errors can have an immediate positive impact on your score.

3. Spend less than 50% of your credit limit: For instance, if your credit limit is Rs. 1 lakh, then make sure that you do not spend more than Rs. 50,000 on your monthly expenses. Spending more than that signifies that you might not have spending discipline and will result in a drop in your score. Consistently keeping within 50% of your credit limit will result in an immediate increase in your score.

4. Do not make multiple applications for loans or credit cards within a short period of time. Many people think they are maximizing their chances of being approved for a loan by applying to several lenders, or by applying for multiple products (house loan, auto loan or personal loan) with one or two lenders. Each time you apply for a new credit, potential lenders make an enquiry. Too many enquiries within a short time frame can cause a drop in your credit score as it signifies that you are ‘hungry’ for credit.

5. Do not apply for credit (whether loan or credit card) if you have a poor credit score. Every loan rejection leads to a negative impact on your score. Make sure that you apply for a loan only once you have a good credit score and are credit-worthy. This way you avoid loan-rejection and the consequent drop in score.