Getting a loan is not the easiest thing. But getting an urgent loan with a low credit score can be doubly difficult. Nevertheless, the loans can be secured even under such circumstances in various ways.
Understand the meaning and implications of credit score
First of all, let’s understand the term “credit score“. A three-digit number between 300 and 900, it allows lenders to assess your creditworthiness as a borrower. Various things determine your credit score, including credit and repayment history, credit card usage, and more.
In general, a score of 750 and above is considered good while between 550 and 750 is considered average. A score below 550 is called a bad or bad score. Depending on your credit score, getting a loan can be easy or difficult. Prices, duration and terms and conditions may also vary.
Generally, it is advisable to develop good financial habits to establish a good credit rating. But in an emergency or emergency, you may need to borrow regardless of your credit score. Here are several ways to get a loan in such circumstances.
Provide proof of EMI repayment capacity
You may not have a proper credit history, but you can still easily repay the loan on the Equivalent Monthly Payments (EMI). Your income is the most important factor that determines creditworthiness after credit score. If you provide your payslip or other valid proof of monthly income to lenders, the loan is more likely to be approved.
Opt for a joint loan or add a guarantor
Personal loans can be sanctioned if you opt for a solidarity loan or if you are a guarantor. The spouse loan can be used through your spouse or another family member who has a good credit rating. Since this person is the co-applicant or the guarantor, it increases the chances of getting a loan even with a low score.
Note, however, that the co-applicant or the guarantor is required to repay the loan in the event of default.
Lenders are keen to offer a secured loan if a collateral is pledged. Collateral is an asset pledged in exchange for the loan. If a borrower does not repay, lenders reserve the right to sell the collateral to recover the unpaid amount.
If lenders are reluctant to give you an unsecured personal loan, a secured loan is the best solution. Plus, it’s better than credit card borrowing or an unsecured loan that attracts extremely high interest rates due to your low credit rating.
For lenders as well, a collateral or secured loan is preferable because it limits their credit risk by providing security in the event of non-payment.
Warning about guarantees
Mortgage-backed loans fall into this category and include real estate loans, securities loans or gold loans. You should only opt for such loans if you are in urgent need of the funds because if you cannot repay the collateral could be lost.
Apply for a lower loan amount
Since lenders may be reluctant to lend you money due to bad credit, the chances of approval can be improved by applying for a lower loan amount. As the risk of default is lower with a lower amount, lenders will be more willing to approve your loan application.
Paying off the above loan on time will then be helpful in building up a good credit history. Once that loan is paid off, if you need another larger loan in the future, the bankers would be ready to lend thanks to your better creditworthiness.
Checking your credit report for discrepancies
Sometimes mistakes can inadvertently creep up on your credit report, affecting your chances of getting a loan. Therefore, you should check your free credit report online at least once a year to determine if there are any errors and rectify them, if there are any.
How a Diligent Borrower Should Handle a Bad Credit Report
Take the case of a diligent borrower who took out a home loan from a leading private bank. The gentleman repaid his loan early a few years before his 15-year term. Given its excellent record, the bank voluntarily granted it a waiver on the last IME.
A few years later, he turned to another private bank for a personal loan. His candidacy was later rejected without giving any reason. The man then approached the largest public sector bank (PSU). Now she has been told her loan approval has been provisionally suspended.
After inquiring, he was told that an IME on his previous home loan was unpaid. Shocked, the man insisted that he had paid off the entire loan and that there was nothing pending. When he researched the exact amount on hold, the bank found it to be zero.
The gentlemen then realized that the EMI waiver had not been properly reported by his previous bank and the system called it in default because a month of payment was overdue. The manager of the PSU bank expressed his inability to help and said it was best for him to contact the relevant credit bureau to rectify the anomaly.
Unfortunately, the credit bureau was only willing to update its file if it paid the fees for their report. Irritated, the man refused to pay for updating an erroneous record, which was not his fault. Fortunately, the problem was resolved when the PSU bank authorized its loan after providing the NOC from the private mortgage lender, indicating that its contributions were fully paid.
This example is used to indicate that periodic checks of your credit report could correct any anomalies, if they occur. If you are unable to correct the discrepancies and update your credit report on time, it could be inconvenient when an urgent loan is required.
Request the No History (NH) or History Not Available (NA) status of your credit report
You can also ask the lender for the NH or NA on your credit report. This is generated if there is no previous credit activity or no credit used in the last three years.
Subsequently, the reasons for your inactivity can be explained to the lender. Loan approval is then possible although the interest rate may be slightly higher.
If traditional avenues fail, approach other lenders
If you have approached traditional lenders for a loan and they have declined your request, it is best to approach those who are willing to lend to people with low credit scores. Note that these loans will only be given at higher interest rates to offset the greater credit risk.
Fintech and NBFC companies
You can search online for lenders offering 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, are likely to have options even for low-scoring borrowers. In addition, their paperless disbursement process is much faster than that of traditional lenders.
Contact your employer’s bank
If your company has salary accounts with a specific bank, you can approach that entity as they will have special offers for employees. The chances of getting loan approval from such a bank are much higher because they have more assurance of being repaid through an ongoing relationship with your business.
Things to avoid when looking for an urgent loan
Research well and avoid approaching several lenders simultaneously
Before contacting a lender for a loan, learn discreetly online about interest rates, eligibility standards, and other policies. If you approach several lenders directly with a loan application, it can trigger serious inquiries with the credit bureaus.
Beware of difficult surveys
“Serious Inquiry” refers to a request that lenders make to the credit bureaus to get a potential borrower’s credit report every time someone applies for a credit card or loan. Multiple inquiries over a short period of time give lenders the impression that you are hungry for credit, reducing your chances of getting approved.
Worse yet, serious inquiries lower your credit score, making it harder to get a loan.
For applicants who have a long-standing relationship with a particular bank or lender, it makes sense to honestly discuss your situation and lending needs. Despite your bad credit rating, the lender can advise you on the best way to provide a loan on relatively better terms.
Watch out for crooks
In the meantime, avoid scammers, especially when you are in dire need of funds. Examine the credentials of the lender and never directly call numbers found online as they could be those of scammers. Always check these numbers with other sources to ensure their authenticity.
Remember, the scammer will offer great terms and conditions. Later, they will ask for some upfront fee like processing fee etc. Always avoid these offers, no matter how tempting, because they are bogus. If you do pay cash, rest assured that this amount will be forfeited and the promised loan will not materialize.
If these guidelines are strictly followed, you can qualify for urgent loans even with poor credit scores and on more friendly terms.