Getting a Personal Loan is one of the most lucrative funding sources to cover most expenses. However, having a good credit score is imperative since these are collateral-free loans for which the lenders want assurance for repayment. Lenders check applicants’ credit scores to determine their creditworthiness and repayment capacity. Most NBFCs require a 750 or above credit score for Personal Loan applications. Those with a low credit score have a history of missing payments, a high DTI ratio, and other factors that make them high-risk borrowers.
However, can a person with a low credit score apply for a Personal Loan? Yes. Below, we will sort out a few ways to apply for a Personal Loan with a low credit score.
Significance of Credit Score for Personal Loans
Lenders always want to take minimal risk while approving loan applications. Therefore, they heavily rely on an individual’s credit score to determine their credibility. Credit bureaus assign credit scores based on an individual’s repayment history, credit portfolio diversity, credit length, DTI ratio, credit utilisation rate, and other factors. On a scale of 300 to 900, a score of over 750 indicates responsible credit behaviour and a low risk of default. That is why applicants with a good credit rating get higher loan amounts at lower interest rates.
Tips to Get a Personal Loan with a Low Credit Score
Although an individual’s credit rating plays a crucial role in determining their creditworthiness, here are a few ways to get an online Personal Loan with a low credit score.
Improve Credit Score
The best thing one can do is wait for a few months and try to improve the credit score. If the expense is not urgent, taking time to improve the rating will make an applicant eligible for a higher loan amount at lower interest rates. Here are a few tips to boost credit score fast:
- Request a copy of the credit report, identify any errors in it, and get them corrected
- Reduce the DTI ratio by paying off all the outstanding balances
- Minimise credit card usage to reduce the credit utilisation rate
- Create a budget to make payments manageable
- Retain old accounts to prolong the credit length
- Maintain different loan types to diversify credit portfolio
Add a Co-Applicant
Those with a low credit score may consider adding a co-applicant to their loan application. A co-applicant with a stable income, low DTI ratio, and high credit score may improve the chances of loan approval. However, one must find a co-applicant who can take the responsibility of repaying the loan if the primary applicant defaults.
Borrow Minimum
Lending money to an individual with a low credit score entails a high risk for the lender. So, they will reject a high loan amount application right away. Therefore, the applicants must evaluate their expenses and carefully calculate the loan amount they need to borrow. Applying for a smaller loan will pose less risk for the lender, and they may agree to approve it at a higher interest rate.
Compare Lenders and Submit One Loan Application Only
Those with a low credit score for Personal Loan may think of applying for multiple loans, hoping they might get approval from at least one. This is the worst thing one can do for their loan eligibility. Too many applications pull multiple hard enquiries on the applicant’s credit report and hurt their credit rating. Therefore, instead of applying for a loan from several lenders, the prospective borrower must research, compare and select the best one according to their loan requirement.
Contact Existing Lenders
The credit score might have dropped due to several reasons, like errors in the credit report, job loss, default from a co-applicant, etc. If the applicant has shown responsible credit behaviour towards their existing lenders, they may agree to approve their loan even with a low credit score.
While most lenders ask for a high credit score for Personal Loan, there are ways to get one using the tips mentioned above. Once the applicant receives their loan approval, they must make a robust repayment plan to pay off the EMIs on time and improve their credit score.