Not getting personal loan to manage an emergency? Offer collateral

Starting a fixed deposit may make a bank more willing to offer you a credit card

Lenders had turned cautious in disbursing unsecured loans in 2020-21. According to data from the Reserve Bank of India's (RBI) April 2021 monthly bulletin, pe­rsonal loans, which had clocked a growth rate of 14 per cent in 2019-20, could register only 8.6 per cent growth in 2020-21.

Growth in credit card outsta­nding fell from 25.7 per cent to 7.6 per cent. Even as loan growth had picked up in the fourth quarter of 2020-21, players are likely to turn cautious again amid the second wave of Covid.

Who will be affected?

Some sections of borrowers, in particular, have been, and will continue to be, hit by the growing tightness in credit standards. “Today, lenders are averse to giving unsecured loans to people who defaulted or delayed paying EMIs, or availed of the moratorium last year," says Gaurav Gupta, founder and chief executive officer (CEO), MyLoanCare.in. They are also wary of lending to people employed in sectors hit hard by the pandemic – hospitality, travel and entertainment. Banks are also wary of new-to-credit customers.

Tighter standards

Lenders are gravitating towards customers with higher incomes. “Earlier, they would have given a personal loan to, say, someone with a take-home salary of Rs 20,000-30,000 per month. Now, many have internal quotas stipulating that loans to customers having income below, say, Rs 30,000, should not exceed a certain percentage of the loan book," says Arun Ramamurthy, a Mumbai-based expert on improving borrowers’ credit scores.

They are also demanding higher credit scores. "A lender, who was willing to lend at a credit score of 650-675, may now only lend at above 680. The threshold credit score has risen by 20 points, on an average," says Adhil Shetty, CEO, BankBazaar.com.

Take loan against security

New-to-bank customers, who do not have a credit history, or have a short credit history, stand a better chance of getting a loan if they offer collateral. “Providing security will smoothen your path to accessing credit,” says Shetty.

Gold loans are the easiest to get. “The interest rate depends on the ticket size. If it is less than Rs 1 lakh, the rate is likely to be 14-18 per cent. As the ticket size rises, the interest rate comes down,” says Gupta. The best rates today are offered by public sector banks — Punjab & Sind, State Bank of India, Canara and Indian Bank, among others. They offer rates ranging from 7 to 8.5 per cent, according to data from Paisabazaar. But avoid high loan-to-value (LTV) ratios on gold loans. If gold prices correct, you will have to provide more collateral.

Other secured loan options borrowers can try for are loans against fixed deposit, insurance, shares, mutual funds, and property.

Those having difficulty getting a credit card should try for a secured credit card. Open a fixed deposit with the bank and it will offer you a card with a matching credit limit.

Young borrowers with a short credit history should try their luck with the bank with which they have their salary account. “It will have some information on the borrower and may be comfortable lending to him,” says Ramamurthy.

Loans from fintech platforms

Borrowers may also try for a personal loan from a fintech platform. "Our loans start from Rs 30,000 and go up to Rs 25-30 lakh. The average ticket size is Rs 3 lakh. Interest rates can range from 10.5 to 32 per cent, the average being 16 per cent," says Gaurav Chopra, founder and CEO, IndiaLends. Interest rate depends on the customer’s risk profile and ticket size (higher rate for lower ticket size). The loan tenure ranges from 12 months to six years, the average being two-and-a-half years. Take these loans from credible players only.