Procuring a loan is not the easiest of things. But obtaining an urgent loan despite a low credit score can be doubly challenging. Nonetheless, loans can be secured even in such circumstances in various ways.
Understand the Meaning and Implications of Credit Score
First, let’s understand the term “credit score”. A three-digit number ranging between 300 and 900, it allows lenders to gauge your creditworthiness as a borrower. Various elements determine your credit score, including credit and repayment history, credit card usage, etc.
In general, a score of 750 and above is deemed good while that between 550 and 750 is considered average. A score under 550 is termed a poor or bad score. Depending on your credit score, obtaining a loan can be easy or difficult. The pricing, tenure and terms and conditions could also vary.
Generally, one is advised to develop good financial habits to build a good credit score. But in cases of urgency or emergency, you may need to borrow irrespective of your credit score. Here are multiple means to obtain a loan in such circumstances.
Providing Proof of EMI Repayment Capacity
It is possible you lack proper credit history but can still repay loan the equated monthly instalments (EMIs) easily. Your income is the biggest factor that determines creditworthiness after the credit score. If you provide your salary slip or any other valid proof of monthly income to lenders, the loan has a higher likelihood of being approved.
Opting for a Joint Loan or Adding a Guarantor
Personal loans can be sanctioned if you opt for a joint loan or provide a guarantor. The joint loan could be availed through your spouse or another family member who enjoys a good credit score. Since this person is the co-applicant or the guarantor, it boosts the chances of obtaining a loan even with a low score.
Do note, however, that the co-applicant or guarantor is liable to repay the loan if you default.
Pledging Collateral
Lenders are eager to offer a secured loan if collateral is pledged. Collateral denotes an asset pledged in return for the loan. If a borrower fails to make repayments, lenders reserve the right to sell the collateral to recover the outstanding amount.
If lenders are reluctant to provide you with an unsecured personal loan, a secured loan is the best way out. Moreover, this is preferable to credit card borrowings or an unsecured loan that attracts extremely high rates of interest because of your low credit score.
For lenders also, a collateral or secured loan is preferable since it limits their credit risk by providing security in case of non-payment.
Cautionary Note on Collaterals
Mortgage-backed lending comes under this category and includes loan against property, loan against securities or gold loans. You should go for such loans only if you need funds urgently because if you cannot repay, the collateral could be forfeited.
Applying for a Lower Loan Amount
Since lenders may be wary of lending you money due to the poor credit score, the chances of approval can be enhanced by asking for a lower loan amount. As the risk of default is lesser with a lower amount, lenders will be more amenable to approve your loan application.
Repaying the above loan on time will then be useful in building up a good credit history. Once this loan is repaid, if you require another loan with a bigger amount in future, bankers would be willing to lend thanks to your better creditworthiness.
Checking Your Credit Report for Discrepancies
Sometimes, errors can creep into your credit report inadvertently, impacting the chances of procuring a loan. Therefore, you must check your free credit report online at least once a year to determine if there are errors and rectify them, if found.
How a Diligent Borrower Should Deal With a Bad Credit Report
Consider the case of a diligent borrower who had taken a home loan from a premier private bank. The gentleman prepaid his loan a few years before its 15-year tenure. Given his excellent track record, the bank voluntarily gave him a waiver on the last EMI.
Some years later, he approached another private bank for a personal loan. Later, his application was turned down without assigning any reason. The man then approached the largest public sector (PSU) bank. Now he was told his loan approval had been held back provisionally.
On enquiring, he was informed that one EMI of his previous home loan was unpaid. Shocked, the man insisted he had repaid the loan in full and there was nothing pending. When he probed further to know the precise amount pending, the bank found this was nil.
The gentlemen then realized that the EMI waiver had not been properly reported by his previous bank and the system labelled him a defaulter as one months’ payment was shown outstanding. The PSU bank manager expressed inability to help and said it was best he approached the concerned credit bureau to rectify the anomaly.
Unfortunately, the credit bureau was only willing to update his record if he paid the fees for their report. Peeved, the man refused to pay for updating an erroneous record, which was not his fault. Fortunately, the issue was resolved when the PSU bank cleared his loan after he provided the NOC of the private home loan lender, indicating his dues were fully paid.
This example is to indicate periodic checks of your credit report could address anomalies, if they occur. If you fail to correct discrepancies and update your credit report in time, it could be troublesome when an urgent loan is required.
Ask for Your Credit Report’s No History (NH) or History Not Available (NA) Status
You can also request the lender for the NH or NA on your credit report. This is generated if there is no previous credit activity or no credit availed in the last three years.
Thereafter, the reasons for your inactivity could be explained to the lender. Loan approval is then possible although the interest rate may be marginally higher.
If Traditional Avenues Fail, Approach Other Lenders
If you have approached traditional lenders for a loan and they have turned down your request, it is best to approach those willing to lend to individuals with low credit scores. Note that these loans will only be given at higher interest rates to offset the greater credit risk.
Fintech Firms and NBFCs
You could search online for lenders providing loans. Financial portals or peer-to-peer lending platforms that facilitate loans from various lenders to those with low credit scores can also be helpful.
Fintech lenders, in particular, will likely have options even for low score borrowers. Also, their paperless disbursal process is much faster than legacy lenders.
Contact Your Employer’s Bank
If your company has salary accounts with a specific bank, you could approach this entity since it will have special offers for employees. The chances of loan approval from such a bank are much higher as it has more assurance of being repaid thanks to an ongoing relationship with your company.
Things to Avoid While Looking for an Urgent Loan
Research Well and Avoid Approaching Multiple Lenders Simultaneously
Before you approach any lender for a loan, make discreet inquiries online about the interest rates, eligibility norms and other policies. If you approach multiple lenders directly with a loan request, it can trigger hard enquiries to credit bureaus.
Beware of Hard Inquiries
“Hard inquiry” refers to a request that lenders put to credit bureaus for a prospective borrower’s credit report each time an individual applies for a credit card or loan. Multiple hard inquiries within a brief period give lenders the impression that you are credit hungry, reducing your chances of approval.
What’s worse, hard inquiries lower your credit score, making it more difficult to procure a loan.
For applicants who have a longstanding relationship with a particular bank or lender, it makes sense to honestly discuss your situation and loan requirement. Notwithstanding your poor credit score, the lender may advise you on the best way a loan could be advanced on relatively better terms.
Watch Out for Conmen
Meanwhile, stay clear of fraudsters, particularly when in urgent need of funds. Scrutinize the lender’s credentials and never call up directly on numbers found online since it could be those of scammers. Always double-check such numbers through alternate sources to ascertain genuineness.
Remember that conmen will offer excellent terms and conditions. Later, they will seek upfront charges such as processing fees, etc. Always avoid these offers, however tempting, as these are fake. If you do pay money, rest assured this amount will be lost and the promised loan won’t materialise.
If these guidelines are followed scrupulously, you can avail urgent loans even with low credit scores and on more friendly terms.
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How To Procure An Urgent Loan Despite Low Credit Score - Forbes
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