Subprime borrowers must keep credit utilisation ratio under check

They must also avoid applying for too many loans within a short span

Retail borrowers in India are hungry for credit and lenders are obliging by giving out loans even to those with a risky profile.

Subprime borrowers now account for 32 per cent of all retail loans, up from 28 per cent in 2019, according to a report by TransUnion CIBIL, a credit bureau.
 

Who is a subprime borrower? 
 

In India, there is no standard definition of a subprime borrower, neither from the regulator nor from the industry.
 

Gaurav Aggarwal, senior director, PaisaBazaar, says, “In many countries, borrowers having the highest perceived credit risk, due to their history of default, delinquency, bankruptcy or low repayment capacity, are considered subprime borrowers.”  

According to TransUnion CIBIL’s classification, individuals with CIBIL scores of 300–680 are classified subprime. The company has used this range in its June 2022 Credit Market Indicator report.
 

Remember, the higher the credit score, the better. 
 

Opt for non-banking financial companies (NBFCs), digital lenders  
 

The credit score plays a critical role when a borrower tries to gain access to credit via a loan or a credit card.
 

Sujata Ahlawat, senior vice-president and head of direct-to-consumer interactive division at TransUnion CIBIL, says, “Financial institutions, such as banks, take your CIBIL score and other factors, including your age, income, and job stability into account when reviewing your credit application.”
 

The minimum cut-off credit score for availing of loans can vary widely across lenders. NBFCs and new-age digital lenders generally have a more relaxed criteria vis-à-vis credit score and other parameters than banks.
 

“Subprime borrowers can approach NBFCs and new-age digital lenders to avail of loans. However, such lenders will charge higher interest rates to compensate for the higher credit risk associated with subprime borrowers,” says Aggarwal.
 

A subprime borrower in possession of gold jewellery can apply for a gold loan. If the borrower defaults on the loan, the lender can easily sell the gold jewellery pledged. These lenders, therefore, are willing to offer gold loans even to those with bad credit scores.
 

Price for being subprime
 

Your credit score is a measure of your creditworthiness. Poor credit score not only makes it harder to obtain a loan, it also increases the interest rate levied.
 

Arun Ramamurthy, director, digital transformation, analytics, and strategy, Andromeda Sales & Distribution, says, “There could be a 100-150-basis point difference between subprime and conventional borrowers when it comes to home loans. On the unsecured side, they could end up paying an interest rate of 25-30 per cent.” 
 

A prime borrower can get a personal loan for 10.75 per cent this festival season. 
 

How to move from subprime to prime
 

A subprime borrower can become a prime borrower by improving his/her credit score. First, he/she needs to monitor his/her credit report regularly.
 

“Monitoring your score and report ensures you’re always credit-ready,” says Ahlawat.
 

“Review your credit score and report at least once every quarter. By doing so, you can detect any clerical errors in your credit report that are lowering your score,” adds Ramamurthy.
 

Ensure you make payments on time since this is a big contributing factor to your credit score and report. Late payment or non-payment will impair your credit score.
 

Another important factor to consider is your credit utilisation ratio.
 

“High credit utilisation indicates a rising debt burden over time and may negatively impact your score,” says Ahlawat.
 

Don’t allow your equated monthly instalment-to-income ratio to exceed 50 per cent. Also, the outstanding on your credit card should also not exceed 30-40 per cent of the total credit limit.
 

Apply for new credit in moderation: excessive number of inquiries signals instability to lenders, suggesting you’re using lines of credit to keep yourself upright.
 

Finally, maintain a mix of secured and unsecured loans to improve your score instead of relying heavily on the latter.

A SUBPRIME PRIMER

HOW NEW-TO-CREDIT CUSTOMERS CAN ACCESS CREDIT

• Those who have just started working don’t have much of a credit history and hence also have a poor credit score
• They are caught in a chicken-and-egg situation: they can’t access credit because their score is poor, and they can’t improve their score unless they access credit
• Such customers should begin by taking small consumer durables loans, say, to buy a mobile phone
• Another option is to take a secured credit card (by opening a fixed deposit at a bank)
• They should repay these loans on time and build their credit history and score
• Those who require larger loans should try for a gold loan or a loan against property