How to get personal loan for bad credit?

Lending is one of the major functions of any bank or financial institution. There are many loan products that can be availed by borrowers depending on their needs and their eligibility for such products. Lenders provide loans based on many eligibility parameters or categories that are predefined for every loan product by each lender.

Overview of Personal Loans

Personal loans are general-purpose loans that are sanctioned to eligible applicants to meet any of their expenses of personal nature. These expenses can be anything from medical expenses, expenses for education, travel, wedding expenses, etc.

It is an unsecured loan that can be used for any purpose that the borrower requires. There is no collateral or guarantor required to get a personal loan. It is because of this that banks are very strict about who gets the loan approved. The risk for the bank is very high and thus the slightly higher interest rate and stringent approval rates. A credit score is very important as the lenders first look at it before moving ahead with the approval process. These loans have a relatively faster processing time and are sanctioned fast.

The most common eligibility criteria for personal loans are,

• The credit score of the applicant
• Age of the applicant
• Income/Repayment capacity of the applicant
• Loan amount needed
• Tenure

The Critical Role of Credit Scores for Personal Loan Eligibility

One of the most important factors for personal loans is the credit score of the applicant. A person with a good credit score is easily qualified for a loan at a lower rate of interest, larger loan amount and a longer tenure.

On the other hand, individuals with low credit scores find it difficult to qualify for a personal loan. Even if granted, the interest rate and other loan terms aren’t favourable.

What is a credit score?

A credit score is a three-digit number issued by authorised credit bureaus to ascertain the loan worthiness of borrowers. The credit score is based on several factors like how timely you have been with loan repayments, the overall debts you have, the type of debts, etc. A higher credit score implies that the person has a sound repayment capacity and is not a risk for defaulting on loans or other payments.

If a person has defaulted in the past, on payments of credit card or prior loans, then the credit score of such person will be lower. A person with a lower credit score is considered to be a high-risk candidate for loans. If a lender sanctions any loan to a person with a low credit score, it will usually be at a higher rate of interest.

The reason credit report and credit score are given so much importance are because it determines most of the attributes of a loan – Interest rate, tenure, loan amount etc. Banks generally prefer people with a credit score of 750 as an ideal borrower. Anything below that your rate of interest(increases), loan amount(decreases) and tenure(decreases) will get affected.

What are the common causes of a low credit score?

The credit score is a crucial factor in determining the rate of interest, amount of loan, and tenure of the loan. This makes it of the utmost importance for a person to maintain a good credit score. However, in most cases, people do not even know they have a bad or low credit score till the time they apply for a loan or a credit card and the same is rejected. The most common causes or reasons for a person’s credit score to be poor are,

• Defaults in payment of EMI or credit card dues
• Having  a high credit utilization ratio
• Multiple ongoing debts that increase the debt-to-income ratio
• Using credit limit over and above the limit specified for a cardholder
• Prior rejection of any loan or credit card application
• Applying for multiple loans or credit cards with many lenders at the same time

How can I get a personal loan with a bad credit score?

An applicant with a bad credit score usually is not approved for a personal loan or any other loan. However, there are certain measures or tips that the customer can use to get a personal loan despite having a low or bad credit score. Some such measures are discussed below.

Applying with a co-applicant

The most common way to apply for a personal loan despite having a low credit score is to apply jointly with one or more co-applicants. Most banks require the co-applicant to be a person from the immediate family of the applicant. If the credit score of the co-applicant is higher, then the loan will be sanctioned even if the credit score of the primary applicant is low.

Providing proof of repayment capacity of the applicant

The applicant can provide proof of his/her source of income to certify that he/she has a sufficient repayment capacity for the loan applied. A higher repayment capacity will ensure the lender of the viability of the loan and thus the applicant can get the personal loan easily.

Improving credit score

The applicant can try and improve his/her credit score by some simple measures like,

• Repaying existing dues or liabilities
• Timely payments of any further credit card dues or EMIs
• Keeping the credit utilization ratio in check

These simple measures will improve the credit score of the applicant after which the applicant can easily get a personal loan from any lender.

Applying through alternate lenders

Most banks insist on the applicant having a good credit score before sanctioning any loan. This is especially necessary in the case of personal loans as they are in the nature of unsecured loans. Hence, an applicant having a low or bad credit score can apply for a personal loan through alternative lenders like NBFCs, MFIs etc. who require the applicants to meet basic eligibility criteria for personal loans.

Apply for a lower loan amount 

Another easier way to get a personal loan despite the applicant having a low or bad crier score is to apply for a lower amount of loan. The banks may sanction the reduced amount of loan provided the applicant meets the other eligibility criteria set by the lender.

Pledge a collateral

Personal loans are unsecured loans. The applicant can, however, pledge collateral or security with the lender to get the loan sanctioned if such applicant has a low or bad score that prevents them from getting the personal loan. The lender is thus assured of the viability of the loan given or can get the proceeds from the sale of such collateral to minimize their losses in case of default.

FAQs on how to get a personal loan with bad credit?