When you approach lenders for a personal loan, the first thing they usually do is check your credit score. Your credit score is a score of your credit history, the amount of credit availed by you, your repayment abilities, etc. Since personal loans are collateral-free or unsecured loans, lenders will evaluate if lending to you would be a risky proposition and a credit score will help them determine that.
While it is a general notion that people with low credit scores cannot get a personal loan, the truth is that there are many lenders who offer personal loans for people with low credit scores. Some of them have been listed below:
What is a CIBIL Score?
The way bank and other financial institutions can know your credit worthiness is through your CIBIL (Credit Information Bureau Limited) score. It a number that is associated with you and tells the bank how responsible you are with your loans and credit cards. The CIBIL score
is one of the prime parameters used to determine the approval of a loan. The CIBIL score was India’s first ever credit rating system and is recognised by all the banks as an authority on an individual's credit rating.
How does CIBIL Score work?
How the CIBIL score system works is similar to the credit score systems found in many countries. You are assigned a score, a number, between 300 and 900. The number that you get is a result of the information that the banks forward to CIBIL. This information is a collection of your repayments of Personal Loans, home loans, vehicle loans and credit cards. If all your payments are made on time, then you can hope to have a good score.
If you skip payments or fail to pay the credit back in time, it could lower your credit rating which would, over time, would make it difficult for you to get approved for a loan. CIBIL is also going to include utility bill payments which means that your score could improve or deteriorate depending on when you pay your phone, electricity or water bills.
What factors lower CIBIL Score?
Since CBIL scores are supposed to be an indicator of your financial habits, the score changes based on how you handle your loans and credit cards. These are some of the factors that can have a negative effect on your CIBIL score.
Personal loans - Since personal loans are unsecured loans, taking too many personal loans can cause your credit score to fall.
Missing loan instalments - If you miss an instalment on your loan then it may be viewed as poor financial planning which means that your credit rating will suffer making it difficult for you to secure loans in the future.
Coming too close to the limit on credit cards - If you are too close to the limit of your credit cards too often, it too points at constant debt and an inability to manage money wisely leading to a reduction of your CIBIL score.
Not paying credit cards back on time - Just like the EMI for your loans, if you fail to pay your credit card dues on time, they too can have a negative effect on your credit history.
Not paying credit cards in full - You might think that paying just the minimum due on the card or slightly more than that is enough to keep things under control but it's not. While the banks may not be overly concerned that you have an outstanding balance, CBIL on the other hand takes it as a negative sign. For CIBIL, outstanding balance are not a good thing and tend to lower your scores.
Not having any credit at all - It may sound like a good place to be in if you don't have any loans or credit cards at all when in fact it is not. This is so because not having a credit history means that your credit score is 0 by default which means that if you were to apply for a loan or a credit card, the chances of it getting reject are higher.
Too many rejected applications for loans/credit cards - If you apply for a loan or a credit card and your application is rejected, you tend to apply with another bank, and another and so on. Such practices reduce your score for two reasons. The first is that CIBIL takes constant rejects to be a bad sign and secondly because every time a bank requests CIBIL for your credit information, your credit scores come down.
Settling credit cards - If you have settled credit cards, that is, if you have negotiated with the bank and closed a credit card after paying an amount lesser than what was due on the card, then your credit history will receive a red flag that could cause trouble later.
How CIBIL scores affect eligibility for loans
While banks may not tell you what CIBIL score makes you a perfect candidate for a personal loan, they do say that your credit score will play a part in the approval of your application for a loan. If your score is below a certain number, then chances are that you may not be approved for a loan.
Even if you are approved, the interest rates offered to you may be higher than those offered to someone with a good score. While most banks in India may be vary of providing loans if credit scores are low, there are private finance companies that may offer personal loans for low CIBIL scores.
How to improve your CIBIL score
If you happen to have a CIBIL score that is not good, then there is no reason to lose heart. There are things you can do to improve that score. Here are some tips that can help you improve your credit rating.
- If you have credit cards with outstanding balances then you need to pay them back at the earliest possible because even if you pay the minimum due, it only gets the bank off your back, the remaining is still considered outstanding by CIBIL.
- If your credit score is not good, try to keep the borrowing down to a minimum. Doing this will give you time to recover from your current debt without creating new debt.
- Let's assume that you have cleared all your debt and decide that to celebrate your freedom from debt you will cancel all your credit cards, DON'T! If you cancel all your cards, then you won't be able to create a credit history when you need one at a later stage.
- If you don't have cards or loans that can help you create a credit history to get your score going, you can always go in for a secured loan like a vehicle loan. Sure you may not get the best interest rate on such a loan but at least you may get a loan that can help you jump start your credit history.
- There are times when you move into a house and realise that because of the misdeeds of the person who stayed there before you, the address has been blacklisted. What you can do in this case is to inform CIBIL of the mistake and get it corrected.
- As far as using your credit cards are concerned, make sure you don't come close to the limits of your cards too often. If you do, then your score might deteriorate further.
- In case you can't get a loan or a credit card to get the history going what you can do is to approach banks that provide credit cards against fixed deposits (FDs). The idea is that you open an FD with them and they will issue you a credit card that has a limit slightly lesser than your FD amount. This will get you into the credit system and get your credit history going.
- In time, even utility bill payments are going to affect your CIBIL score so it's best to make a habit of making sure that ALL your bills are paid in full and on time.
- If you are rejected for a loan or credit card once, don't keep applying for one at other banks. Take some time out to fix your score and then apply again.
How to get a personal loan when you have a low CIBIL Score
When you have a poor credit score as indicated by your low CIBIL Score, it sure will be a challenge to get a personal loan. However, it is not impossible. Despite your low score, many lenders will be ready to offer loans to you but they may charge a slightly higher rate of interest. Many fintech platforms and NBFCs these days offer personal loans despite a low credit score and some of these have been listed below:
- Credit Sudhaar Finance
- Vintage Finance
- Home Credit
Do not forget to shop around before you pick a lender and when you manage to get a personal loan, ensure that you make the payments regularly so that you can gradually build up your credit score.
Frequently Asked Questions on Personal Loan for People with Low CIBIL Score
1. What is the minimum CIBIL score I need to avail a personal loan?
Answer: If you have a score between 600 to 750, you can approach banks or financial institutions for a personal loan. However, since the score is neither good or bad, lenders will be cautious and may carry out additional credit checks before sanctioning a loan to you. They may also charge you a higher rate of interest.
2. How do I check my CIBIL score?
Answer: You can check your CIBIL or credit score on the BankBazaar website under the ‘Free Credit Score’ section on the homepage. You can also check your score on the official website of CIBIL at www.cibil.com. Once you visit the site, you will be asked to enter your personal details such as name, phone number, email ID, etc., after which your score will be displayed to you.
3. I have never taken a loan or a credit card. Will, I still have a CIBIL score?
Answer: If you have neither borrowed from any bank or financial institution nor owned a credit card, you will have no credit history which will be indicated by a –1 score. Some lenders may lend to you as a first-time borrower because they will not be able to gauge the risk.
4. What is a good CIBIL score?
Answer: A CIBIL score between 750 to 900 is considered a good score and most lenders will approve your request for a personal loan. Lenders will also be happy to lend to you at a lower interest rate, and may even offer discounts on pre-closure charges and processing fees.
5. What benefits will I get if I have a good CIBIL score?
Answer: Having a good CIBIL score will give lenders the confidence to sanction your loan request. If you have a good credit score, you can negotiate with the lenders to give you a good deal on interest rates, processing fees, etc. You may even get pre-approved offers which will let you avail a personal loan instantly with minimal documentation.
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