Lending institutions, from traditional banks and non-banking financial companies (NBFC) to money lending apps, check your credit score when you apply for retail loans. Your credit score determines your eligibility, interest rate and the loan amount—and individuals with higher credit scores stand at a better chance to avail of loans than those with low or bad scores.
Yet salaried and self-individuals who have bad credit scores can still avail of loans. Here are some alternatives.
What is a Bad Credit Score?
A credit score is a three-digit number ranging from 300 to 900, and higher the score means you stand a better chance of availing a loan from financial institutions. Credit bureaus in India, such as TransUnion CIBIL and Experian, rate your credit scores based on records of all types of credit or loans you have taken in the past. Your credit score is assessed on parameters such as outstanding debts, repayment history, loan tenures, credit mix, ratio of debt to income, etc.
Below tables show the credit score range and the rating criteria.
Most lending institutions, especially public and private scheduled banks, consider individuals’ credit score of 700 and above as good before sanctioning the loan. However, the loan amount for any type of retail loan also depends upon a number of parameters such as your salary or income, outstanding equated monthly installments (EMIs), to name a few.
Here are the popular ways for individuals who have already taken loans to improve their credit scores:
- Make timely payments on your outstanding loans and credit cards.
- Make your payments before, or by the due date.
- Consider paying more than the minimum due amount if your credit utilization is high.
Learn from the helpful resources below to know more about credit scores and ways to improve your rating.
Helpful resources
CIBIL Score Check: How Does Credit Score Work?
What Is A Good Credit Score?
How To Increase Your CIBIL Score In 2023
How To Maintain Your Creditworthiness During A Recession
What is a Bad Credit Loan?
Applicants with an average credit score (500 to 649) or poor (300 to 499) generally face a difficult time to avail of retail loans such as personal loan, car loan, two-wheeler loan, education loan, etc. However, there are lending institutions who are willing to extend credit to applicants with low credit scores over and above basis eligibility criteria.
Bad credit applicants will typically receive high interest rates and lower loan limits due to their credit scores. The lowest rates and most favorable terms are reserved for high-qualified applicants.
Eligibility criteria to apply for a bad credit loan
Applicants
Salaried, or pensioners, of both private and government establishments.
Self employed businessmen, or professionals
Applicants’ age
Salaried: 21 to 58 years of age.
Self-employed: 25 to 65 years of age.
Minimum annual income
Salaried: INR 10,000 to INR 15,000 per month.
Self-employed: INR 3 lakh per annum.
Employment tenure
Salaried: Working for a minimum one to three years.
Self-employed: One to three years of stable business.
Helpful resources
Eligibility Criteria for Self-Employed to Apply a Personal Loan
How To Check Your Eligibility For A Student Loan
How to Increase Home Loan Eligibility in 2023
Eligibility Criteria for Applying a Car Loan
Features and Eligibility Criteria for Two-Wheeler Loans
Types of Secured Loans for Bad Credit
Banks and lending institutions provide secured loans to bad credit applicants against an asset they own as collateral. Applicants not only stand a chance to avail of secured retail loans but also avail of lower Interest rate when the EMI begins, while improving their credit score.
Here are popular secured loans for bad credit applicants.
Loan against gold jewelry for bad credit
Banks and non-banking financial companies (NBFC) provide secured loans up to 75% loan-to-value against gold jewelry based on the purity, weight, and its current value in the market. The rate of interest on gold loan is applied when the EMI begins for a tenure starting three months up to three years.
Bad credit loan against term deposits
Term deposits are investment instruments, such as fixed deposits and recurring deposits, individuals have with banks and post offices. Depending upon the lending institution, applicants with bad credit can get loans starting INR 5,000 up to 95% against the term deposit value in your account. Banks usually charge 1% interest on the principal loan amount.
Loan against shares and bonds
Shares of a company are owned by individuals which are traded on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Whereas, bonds are low-risk fixed-income instruments, such as government securities, corporate bonds, inflation-linked bonds, zero coupon bonds, as well as sovereign gold bonds (SGBs). Bad credit applicants can pledge shares and bonds they own and get bad credit loans up to INR 10 lakh to 20 lakh, depending on its value.
Loan against property for bad credit
Bad credit applicants can avail of secured loan against the property’s title deeds, and get up to 75% to 95% LTV ratio of the property’s value. The rate of interest on home loan is applied when the EMI begins. Remember, those who have opted for the old tax regime can also avail of tax deduction benefits under Section 24, Section 80C, Section 80EE of the Income Tax Act.
Related: What Is A Secured Loan And How To Get One?
Unsecured Loans for Bad Credit Applicants
Other than secured loans, bad credit applicants can also avail of unsecured loans from financial institutions. Popular ways to avail of such loans include:
Bad credit loan with a co-applicant or co-borrower
Co-borrowing arrangement with a salaried individual may be a helpful solution for a primary borrower with a bad credit to avail of retail loans. In such a type of loan, both share the responsibility for loan repayment. In addition, co-borrowing improves chances of getting a higher loan amount at a competitive interest rate.
Guarantor loan for bad credit applicants
Individuals with a poor credit history or low credit score can avail of a retail loan with a guarantor (friends and family) who provides a financial backing in case of missed or late debt payments. In such a type of unsecured loan, guarantors take the responsibility to repay the missed EMI, or the loan amount.
Peer-to-Peer Personal Loan for Bad Credit
Peer-to-peer lending is steadily on the rise, particularly among bad credit applicants, due to ease of digital processing of loans, which does not affect your credit score.
Through such a type of money lending app, another individual would be funding your loan, and not an institution.
Remember, salaried applicants will have to submit relevant documents, especially proof of income, to prove your eligibility for repayment. Also, such a type of loan has a higher borrowing rate, origination fee as well as fee for late payments.
Tips to Apply for a Bad Credit Loan
Applicants with bad credit will have to carefully research their options, like mentioned above, before applying for a bad credit loan. Once you’ve figured out the interest rate, other charges, and especially your financing needs, here are helpful tips to apply for a bad credit loan.
- Check your credit score.
- Check and rectify errors in the credit report
- Improve your score, if necessary
- Apply for a lower loan amount
- Submit proof of income
- Submit proof of job stability
- If possible, prequalify with a provider.
- Check for additional fees.
- Submit your application.
Bottom Line
Taking a personal loan, or borrowing money, should be a last resort as it can be very expensive, particularly for individuals with bad credit scores. Consider saving money, instead. Remember, scammers are at large who can easily lure you into getting a loan against your financial obligation. Take necessary help, advice, and research before considering a bad credit loan.
