Since getting a personal loan is one of the most popular ways to borrow money in both cities, many people think that having a low credit score reflected in the free cibil report means they can’t get a personal loan. But that’s not how things are.
Besides understanding how to improve cibil score, here are some useful tips to help you get a personal loan even if you have bad credit or no credit:
Borrow less money as a loan
In addition to your credit score, lenders look at your income and how much you already owe when deciding if you are eligible for a personal loan. Then, the eligible loan amount is set based on the lender’s assessment of the borrower’s credit risk and the borrower’s credit history. Now, if you have a low credit score or none at all and are in the process of knowing how to improve cibil score, getting a loan for a lesser amount tends to lower the credit risk for the lender, which makes it more likely that you will get the loan. This is because applicants with poor credit histories shown in free cibil report are often seen as less reliable. So, getting a personal loan for a smaller amount can increase your chances of being eligible and getting it.
Loop in a co-applicant
When trying the steps required regarding how to improve cibil score, remember that when personal loan lenders aren’t sure about an applicant’s ability to pay back the loan, they often require a guarantor or co-applicant to make it more likely that the loan will be approved instead of just saying no. And as a low credit score can hurt your chances of getting a loan, adding a co-applicant or guarantor with enough income and a good credit score reflected on a free cibil report can increase your chances of getting a loan may even make you more eligible for a loan overall. Since the co-applicant or guarantor is also responsible for paying back the loan, the lender has a bigger safety net and can approve the loan. But if you add a co-applicant or guarantor to your personal loan, keep in mind that if you don’t pay back the loan on time, it will hurt not only your credit score but also theirs.
If banks say no, try NBFCs and fintech
Unlike banks which strictly reject your loan even when you are taking steps on how to improve cibil score, financial institutions like NBFCs and fintech tend to have less strict criteria for evaluating Personal loan applications. This makes it easier for people who were turned down by banks to get loans from these institutions. If you want a personal loan but have a low credit score, you can go to an NBFC instead of a bank. The chances of getting a personal loan from an NBFC are higher than from a bank. But keep in mind that most NBFCs and Fintechs charge higher interest rates than banks.
At first, settle for a higher interest rate initially.
Since having a good credit score in your free cibil report is becoming more and more important for getting a personal loan, its role is no longer just to determine who is eligible. Lenders have started tying loan rates to the credit score of the person applying for the loan. This means that people with a low credit score will have to pay a higher interest rate on their personal loans. Since lenders often turn down loan applications from people with bad credit, paying a higher interest rate would still be better than getting turned down more than once.
But before you decide on a loan with a high interest rate, you might want to compare different loan offers based on your credit score, monthly income, and other eligibility criteria. Make sure that your debt-to-income ratio, which includes the new EMI, doesn’t go over 50–60% when you decide on the EMI for the personal loan. Consider a longer term to lower your monthly payments, and try to pay it off early to lower the total amount of interest you pay.
Also, once your personal loan is sanctioned and disbursed, make sure you pay it back in a responsible way, as this will help your credit score over time, especially for those who do not know how to improve CIBIL score. When your credit score gets high enough, you can switch to a different lender with a lower interest rate and better service terms. This is called a “balance transfer.” Before you decide to do this, make sure that the amount you’ll save on interest is big enough to outweigh the costs, such as the processing fee and administrative fees, since the balance transfer will be treated as a new loan application by the new lender.
Now that you know how to get a personal loan, even if you have a low credit score, it would be smart to also take the steps you need to fix your credit score. Your financial health will be helped in many ways by having a better credit score.
Firstly, remember that when you don’t pay your credit card bill or loan EMI on time or miss a payment, it shows up on your free CIBIL report and brings down your credit score. So, make sure to pay your loan payments on time and in full, and never miss or delay your EMI payments. This would help you build or improve your credit score over time, which would increase your chances of getting a personal loan in the future.
The next vital aspect to keep in mind is that when getting a personal loan, one of the most important things credit card users can do to keep or improve their credit score is to keep their CUR below 30%. This term refers to how much of your credit card’s total limit you have used. Credit bureaus lower your credit score if your credit utilisation ratio is over 30% because lenders usually see this as a sign that you want more credit.
If you tend to go over this limit often, ask your credit card company to raise your limit or get another credit card. This will increase your total credit limit and lower your credit utilisation ratio.