Obtaining a loan with a bad credit rating

As a borrower, you will fall under the ambit of credit scores that will determine whether you are eligible for availing a loan or not. Credit Information Bureau Limited (CIBIL) uses your financial data to create a credit information report on you, which assigns you a credit score or rating. This rating will identify you as a “good” or a “bad” borrower.

However, having a low credit rating does not mean that you can never get a loan. Your options may be limited or you may have to shell out more money as interest, but a few precautions and smart financial moves can ensure that your credit rating does not impact the clearance for a loan.

Understand your credit rating

CIBIL scores fall between 300 to 900. Any score above 700 marks you as a “good borrower” who repays loans on time. This increases your credibility with lenders. Scores below 700 reflect poorly on your repayment abilities, and the loans you apply for could be rejected.

Your credit rating would be affected not only if you have defaulted payments on previous loans/debts/bills, but also if your loan has been previously rejected, and even if you have never borrowed before.

Check your credit score and verify it before applying for a new loan. Sometimes, there might be errors in the credit score because of insufficient or incorrect information. Cross-check all the details on the CIBIL website to ensure that the score assigned to you is fair.

Check all your options

Many institutions do not refer to the credit score or give it undue importance. Examine the loan plans of all lenders – nationalized and cooperative banks, and other financial institutions. This will help you determine how many of them consider your credit rating important.

Give first preference to loans from reputed banks and financial organizations, even though many of them will ask for a CIBIL Rating. Loans from unrecognized institutions may be prompt and have attractive rates, but they come with a lot of physical and psychological stress.

Be prompt with documentation

Before applying for a new loan, check whether you are eligible for it. If you are rejected for some reason, your credit score will decline further. Submit your applications and required documents promptly. Delay in submitting documentation could lead to repeated queries from the lenders and lower their trust in you.

Other kind of loans

If you are not eligible for a personal loan because of your bad credit history, you could use one of your securities – house, car, or insurance policy – as a collateral for a loan. Interest rate for secured loans is lower than that for personal loans. However, if you are unable to repay secured loans, the collateral asset could be confiscated by the bank.

You can approach cooperative banks or credit unions who have lower rates of interest and less stringent requirements while applying for loan. Pledging your gold ornaments at cooperative and nationalized banks is another viable option. If you have a Fixed Deposit or Recurring Deposit with banks or post offices, consider withdrawing them instead of going for a loan.

Another option is to borrow money from your friends or family. You would generally be free of interest, or be expected to pay small rates of interest, in such borrowings. However, ensure that you maintain their trust and repay the loans on time.

Simultaneously, you must also work on improving your CIBIL score by ensuring that all your bills/EMIs/credit card or loan payments are done promptly. Do not take loans at high rates of interest if you are uncertain of being able to pay them back on time. Do not take more than one loan at a time. Save up some money for urgent requirements by investing in smart savings or investment plans.