Banks and NBFCs use credit scores to evaluate the creditworthiness of loan and credit card applicant. Credit score of 750 and above are considered as good and hence, those not making the cut have very low chances of loan or credit card approval or pay higher rates for them.
While there are time-tested methods of improving your credit score, those take time and patience. The following tips and suggestions will help you avail loan to deal with financial exigencies or unavoidable life-events, despite your poor credit score:
Opt for secured loan:
Secured loans are those in which the loan applicant has to pledge asset(s) as security or collateral against the loan amount. Loan against property, loans against fixed deposits, loan against securities, gold loan are some of the most popular variants of secured loans. As the lenders have the option to sell your collateral in the event of a loan default, they may ignore or relax the requirement of a good credit score while evaluating your creditworthiness.
For borrowers with similar credit profiles, secured loans usually have a lower interest rate than the unsecured loans. Given that those with lower credit score might have to pay a higher interest rate on an unsecured loan, opting for a secured loan might help in reducing your interest cost.
NBFCs and HFCs usually have less stringent loan evaluation processes than banks. NBFCs and HFCs usually target borrowers avoided by banks. Hence, those with lower credit score may have higher chances of loan approval from NBFCs than banks.
Approach NBFCs and HFCs if banks refuse to lend you due to your poor credit score. Remember that NBFCs/HFCs usually charge higher interest rates than banks.
Add guarantor or a co-applicant:
Banks and other lending institutions often ask for a guarantor or co-applicant for loan applications when they are not sure about the repayment capacity of a primary loan applicant. As the co-applicant and/or the guarantor become equally liable for the loan repayment, addition of guarantor/co-applicant increases the safety net for the lenders. Thus, if the lenders refuse to approve your loan application due to your poor credit score, offer them to bring in co-applicant(s) or guarantor(s) in your loan application.
Adding a co-applicant/guarantor with a stable income might also help you to get a higher loan amount at lower interest rates and other favourable terms and conditions. However, remember that any delay or default in your loan repayment would reduce the credit scores of your co-applicant and guarantor, just like yours.
Settle for a lower Lower-to-Value (LTV) ratio:
Lenders use this ratio for evaluating secured loan applications. It denotes the ratio of the loan amount sanctioned against your property value. Lenders fix the LTV ratio on the basis of their risk assessment and credit profile of the loan applicant. Those with lower creditworthiness are usually offered lower LTV ratio. Additionally, the regulators may also cap the upper limit of LTV ratios as in case of a home loan.
Thus, if the lender refuses to sanction your loan because of your poor credit score, try sweeten their deal by offering them lower LTV ratio and higher down payment money. For example, if your home loan application with 90% LTV ratio is rejected due to inadequate credit score, request the lender to reconsider the loan application with lower LTV ratio, say 65–70%. Doing this will not only increase the probability of your loan approval, it will also bring down your EMI and your overall interest cost.
Settle for loans at higher interest rate:
As lenders have increasingly started to link their loan rates with the credit score of loan applicants, get yourself prepared for paying higher interest rate on your loans for having a poor credit score. During unavoidable situations, paying a higher price for your loan would still be better than getting no loan at all. However, before settling for a high-interest rate loan, visit online lending marketplaces to get loan offers based on your credit score, monthly income and other eligibility criteria from the widest possible range of lenders. While settling for the EMI, make sure that your total EMI, including that of the new loan, do not cross 50% of your net monthly income. Opt for a longer tenure if your total EMI exceeds the said level.
To sum it up, while a poor credit score may deprive you from availing loans with a higher LTV and lower interest rates, it is not the end of the road. Visit online lending marketplaces to find out the lenders ready to offer loans on the basis of your credit score and other criteria. Also avoid applying with multiple lenders within a short span of time as that would further reduce your credit score and thereby your loan eligibility. Each direct loan or credit card application with a lender will reduce your credit score by a few points and too many loan application will drain your credit score faster. Comparing loan offers through online lending marketplaces will, however, not impact your credit score.
Once you have the loan disbursed, ensure its repayment by the due date. Timely repayments will steadily notch your credit score upwards. Once your credit score exceeds 750-800 level, transfer your outstanding balance to another lender at a lower interest rate.
The writer is CEO and co-founder, Paisabazaar.com. Views expressed are his own