How to approach lenders for a loan if you have poor credit score

Occasionally, we find ourselves in dire need of funds and that’s when we reach out to banks/lenders to meet this requirement. Sometimes our loan application may get rejected by lenders on grounds of poor credit score. This could be because of failure on our part to honour repayment for Credit Cards or running Loans or due to certain errors on part of lenders/credit bureaus.

 Whatever may be the reason, our credit score is one of the most important factors that banks and lenders consider while evaluating loan application. Hence, you have to work towards improving your credit score. However, this process may take time, which your present day circumstances may not permit. So, does it mean that you have hit a dead-end because of poor credit score? Perhaps, not!

Here is how you can still avail credit despite your poor credit score:

Add a co-applicant:

Banks ask for a co-applicant for your loan when they are not sure about your own repayment capability. Adding a guarantor/co-applicant to your loan increases the probability of your loan approval, as your loan guarantor/co-applicant becomes liable with you for your loan repayments. Adding a co-applicant with a stable income may also help you in negotiating for lower interest rates and higher loan amount.

Please note that any default in loan repayment may affect your co-applicant's credit score and hence, it is imperative for you to ensure that you make timely payment.

Approach other institutions like NBFCs or Peer-to-Peer lenders (P2P):

Institutions other than banks are usually more flexible with credit scores than banks. They usually target customer-segments that are generally avoided by banks. You may try approaching them to meet your emergency funds requirement. On the flip-side, interest rates charged by these institutions are generally higher than commercial banks.

You can approach smaller, local NBFCs in your city and P2P lenders which help facilitate individual lenders lending to individual borrowers via a platform.

Check out online financial marketplace such asPaisabazaar.com for assistance on comparison of these options.

Opt for Gold Loan

Gold Loan is an excellent option for customers who are denied an unsecured loan due to poor credit profile. We all have idle gold lying in our houses/bank lockers, where it yields nothing. For an emergency requirement, Loan against gold is a supreme option due to low interest rates, simple process and takes shortest time duration to get funds. Banks/Institutions usually take 2hrs - 1 day to process this loan and they can fund 60-85% of Gold Value as a loan to the customer.

And your gold is safe with the institution. As soon as you have the funds to re-pay, you can close the loan and get your Gold back.

Consider other Secured Loans

Consider opting for secured loans in case low credit score has dampened the possibility of getting unsecured loans. Simply put, secured loans are those in which the borrowers have to pledge some assets as security for the loan amount. Loan against property, loan against securities and loans against fixed deposits are some of the popular variants of such loans. As banks have the option to takeover or sell the collateral in the event of your loan default, they are more flexible with your credit profile. Moreover, these loans do not have any restriction on the end use of your loan proceeds. Their rate of interest is also usually lower than personal loans. For example, interests on loan against property range between 11%–14% while interest on loans against securities range between 9.20–13%.

To sum it up, a poor credit score may deprive you from low interest rate loans from top commercial banks but it is not the end of the road. Conduct a proper market survey and take the help of online financial marketplace such as www.paisabazaar.com to find out about the lenders may extend loans to you, as per your requirement and credit score.

Take into account your mandatory monthly expenditures or long-term investment commitments before settling for high interest rate loans. Do not let your monthly loan repayments to cross 30–40% of your net monthly income.

Avoid approaching multiple banks/ lenders for loan at the same time as it may reflect poorly on your credit score. Also, once you get the desired loan, ensure its timely repayment to improve your credit score. Once your credit score goes upwards of 700–750, you may choose to transfer your loan to another lender offering lower interest rate.

-By Gaurav Aggarwal, Vice-President, Paisabazaar.com