When you apply for any loan, the first thing a lender looks at is your credit score. Your credit score is a summary of your credit history, all debts incurred, repayment history, and ability to repay.
Madhusudan Ekambaram, Co-Founder & CEO, KreditBee and Co-Founder of FACE, says, “A credit score helps lenders determine whether lending a loan to you will be a risky proposition or not. A credit score of over 600 is usually required to qualify to get a personal loan. All lenders prefer giving personal loans to individuals with a good credit score.”
But, if you have a low credit score, here’s what you can do to get a personal loan:
Prove that your income can support the EMIs: If there has been any recent upward revision in your salary or have any additional income source that you can prove to the lender, they may consider your application.
Ekambaram says, “Also, one can prove that he/she has a steady job and income, lenders are likely to grant a personal loan. However, there’s a high chance that one might have to pay a higher rate of interest.”
Opt for a lower amount of personal loans: If you don’t have a good credit score, experts say one should opt for a small loan and repay it regularly to improve their credit score.
Ekambaram adds, “When one applies for a lower amount, lenders may feel more comfortable approving such a loan as a lower amount is easier to repay. Throughout this process, one can gradually improve one’s creditworthiness and eventually apply for a larger loan from a bank or other financial institution.”
Pledge collateral: Those who have been denied unsecured loans (such as personal loans and credit card loans), or charged exorbitant interest rates, can consider secured loans. Experts say lenders face lower credit risk when they make loans backed by adequate collateral and sufficient liquidity. As a result, they place less emphasis on credit scores when approving applications for such secured loans.
Apply for a joint loan or add guarantor: Involving a co-applicant or guarantor with a good credit score is another way of availing of personal loans if your credit score is low. Ekambaram says, “This can increase the chance of one’s personal loan getting approved.”
These steps can assist in obtaining personal loans for people with bad credit. However, the best and most recommended method is to improve your credit score gradually before applying for credit.