Secured loans may help you tackle tighter credit norms, say experts

Presence of collateral allows lenders to relax their criteria while sanctioning of these loans

The financial distress suffered by retail borrowers during the pandemic is now getting reflected in higher stress in banks’ loan books. According to the data presented by the finance ministry in reply to a question in the Lok Sabha, several banks have seen their stressed retail advances (as a percentage of total retail advances) rise between March and December. Within the retail portfolio, unsecured loans are seeing higher stress.

“The stress is especially high in personal loans given to business owners,” says Arun Ramamurthy, a Mumbai-based expert on improving borrowers’ credit scores.

Tightening credit standards

The industry has tightened its credit standards. Ramamurthy says lenders are wary of lending to the self-employed. Exceptions are only being made for those who have an existing banking relationship.

According to Pankaj Bansal, chief business development officer, “The credit score requirement for issuing credit cards has inched up. Earlier, if the average score required was 700, lenders are now asking for 720.” Issuers have become cautious about issuing credit cards or granting personal loans to new-to-credit applicants. Again, exceptions are only being made for those who work with a top-tier employer or have an existing banking relationship.

“Lenders are also becoming more cautious while approving personal loans to applicants with poor credit scores or having monthly incomes below Rs 30,000,” says Gaurav Aggarwal, director, PaisaBazaar.

Dealing with this hurdle  

If you are unable to get a credit card, opt for a secured credit card. “These cards have the same features as regular credit cards, but are issued against a fixed deposit. The availability of collateral allows banks to be liberal in sanctioning them,” says Aggarwal.

You could also apply for a personal loan jointly with your spouse if she has a better credit profile. “Several lenders allow this. It will improve your eligibility and allow you to get a bigger loan,” says Bansal. 

Those unable to avail of a personal loan may try for a secured loan like gold loan, loan against securities, or top-up home loan. Lenders are again more lenient in sanctioning them. “Secured loans like gold loans and loans against securities also allow varied repayment options, apart from the standard equated monthly instalment, providing greater flexibility,” says Aggarwal.

The best way to deal with tightening credit standards is to improve your credit score. Youngsters usually have a low score due to lack of adequate track record. “Develop a track record by taking a consumer durables loan or by using a secured card,” says Ramamurthy.

Keep enquiries low. Each time you apply for a loan or a credit card, the bank calls for your credit history. Frequent requests affect your score. “Do your research, narrow down to the offer with the highest potential for approval, and apply,” says Bansal. 

Also, each new credit account lowers your average credit age, which affects your score. Having a good mix of unsecured and secured credit also helps improve the credit score. 

  

When on the verge of default

Request your bank to restructure your loan. This can take the form of a payment holiday or extension of tenor. If you are unable to repay unsecured loans, opt for debt consolidation. This means transferring all your high-cost loans into a low-cost loan. “Not only does this reduce your loan cost, it also allows you more time to repay,” says Bansal.