How to Apply for a Personal Loan with Poor Credit or No Credit

07/02/2019

Life is full of surprises and sometimes it may so happen that you may come across unexpected expenses. Expenses that you have not planned for!  What would you do? Borrow from someone you know like family and friends or go for a loan somewhere. These are the kind of expenses which are not covered by standard loans like Home Loan, Business Loan or a Vehicle Loan. In cases as such, you will be left with borrowing the amount from a private money lender at an exorbitant interest rate or approach a bank or other financial institutions for a Personal Loan. So, what would be the main criteria for a Personal Loan? 

While factors that determine your loan eligibility are many, the main factor that dictates your loan is your credit score. The better your credit score is, the more will be your chances of getting a loan at competitive terms and on the other hand, having a low credit rating will make it extremely difficult to procure a loan, as banks may see you as a person who could default on payments.

What would count as a good credit score and bad credit score? How to Get Personal Loans with Low Credit Score?  In this article, we will look at how toApply for a Personal Loan, especially when you don’t have a good credit history.

Let us first understand what a credit score is. A credit score is a three-digit numeric expression derived based on analysis of a person’s credit history, to represent his creditworthiness. To put it in simple terms, it indicates how likely you are to pay your loans/debts. There are various organisations in India like Credit Information Bureau India Limited (CIBIL), Equifax, and Experian India that gather information on your financial history such as borrowings, repayments and so on. By analysing all the gathered information, they will rate your creditworthiness. Each of these companies uses a slightly different scale, so there may be a slight variation in your score, but the general range lies between 300 and 900. In general, if you have a credit score in the range of 300 to 550, you may be considered as a person with a bad credit score, and it would not be easy for you to get a Personal Loan with that score. A bad credit score would convey the meaning that the person has defaulted payments in the past, missed bill payments, or a loans instalments. It can also mean that his loan application was rejected. On the other hand, having no credit score is also risky as lenders such as banks and Non-banking financial companies (NBFCs) will have no way of knowing your loan repayment capability.

How to get a Personal Loan with a bad credit history?

While a good credit history will always be helpful, having a bad credit history is not the end of the world. There are options available for individuals will a low credit score to avail Personal Loans for their emergencies. 

Loan from NBFCs

The terms and conditions on which NBFCs grant loans are slightly lenient than that of banks.  So, a little lower credit score can be overlooked, but there is a chance that you may end up paying a slightly higher interest rate because of low credit score. 

Loans with collateral

This is another way of getting a Personal Loan with a bad credit history. You can take a secured loan, i.e., a loan that requires the collateral for the loan amount. This way, the lender will not be worried much about your credit history. But there is a risk; if you default, the lender will have the right to sell your collateral to recover their loan repayment.

Apply with a co-applicant

Even if you are not eligible for a Personal Loan based on your credit score, you might know someone who has a good credit history and who is willing to help you procure a loan by being a guarantor/co-applicant. The co-applicant needs to vouch for you and needs to understand that if at all you fail to repay the loan, the bank or lender can recover the dues from him.

Provide evidence of your sources to repay

If you are an employee, provide evidence such as your pay slips to prove that you have resources to repay the loan. If you are a businessman, you can provide evidence of your inventory or balance sheet, etc., and give assurance to the lender about your repayment capability. Writing a strong loan application with all support documents will help.

Credit unions

If you are a member of a credit union, you can avail a Personal Loan as Credit unions lend loans to its members to help them out in case of financial difficulties. The biggest catch here is you need to be a member to be able to use their resources.

Peer to peer lending

Peer to peer lending or P2P lending as it is popularly known has been gaining popularity recently for unsecured loans and loans to people with a bad credit history. P2P is essentially a method of debt financing where you can lend your money or borrow a loan without the use of an official financial institution such as a bank. If you want to avoid being charged high-interest rates or want to avoid your loan application being rejected due to poor credit history P2P may prove to be an effective way of borrowing funds. So, how does this work? With peer to peer lending, you can borrow money from individual investors who are willing to lend money. Online platforms for Peer to peer lending are registered with RBI. They provide the lender with your details. The investor can look at your profile and decide how much he can lend you by taking the risk. You may receive the amount required by one lender or multiple people. The interest might be high as there is no guarantee for your loan amount. 

Improving credit score

If you have a chance of correcting your credit score by making small payments, then it would be a good idea to do so. Sometimes, small things like forgetting to pay a Credit Card instalment can reflect badly on your record and can improve when corrected. An improved credit score will improve your chances for procuring a Personal Loan.

Shop around

Even if you have a not so perfect history of credit score, many organisations can evaluate your current income source, say it a job or business and grant you loan accordingly. There may be options that we are not well aware of. You can approach online websites and apply for a Personal Loan within very little time. There are many providers for Personal Loans listed on the website. You may get a good deal like SBI Personal Loan or others. Before you apply for a Personal Loan, it is advisable to get expert advice based on your credit history and profile to determine your eligibility.