Lending institutions measure an applicant’s credit behaviour and repayment habits by checking their credit scores. It is a 3-digit numeric figure that summarises an individual’s credit history, credit amount borrowed, repayment consistency, diversity in the credit portfolio, outstanding balances, etc. It helps determine the risk in lending a loan to an individual based on these parameters. That is why most NBFCs have a minimum credit score requirement to approve Personal Loans. However, that does not mean an individual cannot qualify for a Personal Loan with a bad credit score.
In this article, we have discussed a few measures that one must implement to improve their chances of getting a Personal Loan despite a bad credit score.
What is a Credit Score?
A credit score is a 3-digit number credit bureaus issue to ascertain each borrower's creditworthiness. They calculate this number based on several parameters, including overall debts, type of debts in the portfolio, history of loan and credit card bill payments, credit length, etc.
A higher credit score implies that the individual is capable of repaying their loan EMIs on time and has a low risk of defaulting on the payments. Those with a history of default have a lower credit score that projects them as high-risk borrowers. If the loan company sanctions Personal Loans on bad credit scores, they are usually at higher interest rates.
Also Read: What Credit Score do I need for Personal Loan
Identify the Causes of Bad Credit Score
Apart from the interest rate, the credit score also determines an applicant’s loan size and tenure. That is why maintaining a high credit score is of utmost importance. However, many people are only aware of their bad credit score once they submit their Personal Loan online application and it gets rejected. The most common causes of bad credit scores include the following:
- Delaying or missing EMI and credit card bill payments
- High credit utilisation ratio
- Multiple debts at a time that increase the debt-to-income (DTI) ratio
- Prior rejection of a loan or credit card application
- Applying for several loans with many loan companies at a time
- Credit portfolio built with the same type of credit
Tips to Get Small Personal Loans for Bad Credit
Most lending institutions often reject individuals looking for the best Personal Loans for bad credit scores. However, they can use certain tips and measures to get a Personal Loan despite a low credit score. Here are some tips:
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Prove Enough Income to Support EMI Payments
A person might have had a financial crunch in the past due to job loss or low salary, forcing them to miss a few EMIs and reducing their credit score. Now if they have received an increase in their salary or got an additional source of income, the loan provider may consider their application despite a low credit score.
Communicating to the lender that the applicant has a steady income and stable job and can afford EMIs consistently is crucial. By doing that, lenders are likely to grant the loan despite a bad credit score. However, they may charge a higher interest rate for the bigger risk they take.
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Apply for a Smaller Loan Amount
An aspiring borrower with a low credit score demanding a high loan amount indicates a high risk to the lending company. From the NBFC's perspective, such an applicant is a high-risk credit-hungry borrower with a huge chance of default. In such a situation, evaluating the urgent financial needs and applying for a lower amount might attract approval due to the low risk involved. The lenders may feel safer granting a smaller loan that is easier to repay for the borrower.
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Approach the Lender with a Co-Applicant
Those seeking the best online loans for bad credit scores can get approval by approaching the lender with a creditworthy co-applicant. If the co-applicant has a steady income and a good credit score, they can add their creditworthiness to the primary applicant’s eligibility and improve the chances of approval. However, the co-applicant will also share the responsibility of repaying the loan along with the primary applicant.
In case of missed EMIs, the lending institution will also approach the co-applicant for repayment. Loan default will also affect the co-applicant’s credit report, which is why people might not agree to co-apply for a loan easily. However, getting one would be an advantage to getting the best loan for a bad credit score.
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Correct Errors in the Credit Report
Having errors in the credit report is quite common. They often occur when the credit bureau does not update the latest credit-related information in the record, and the individual applies for a loan in between. Some mistakes may include incorrect name spellings, addresses, and account numbers, leading to discrepancies in the credit report. Errors like these often take a toll on the credit score due to no fault of the applicant. Everyone must check their credit report regularly, identify errors in it, and get them corrected at the earliest. This will boost their credit score and make them eligible applicants for loans.
Also Read: Business Credit Score VS Personal Credit Score
Factors That Help Improve the Credit Score
Now that you know how to get the best Personal Loans for bad credit scores, the first priority should be to improve the score and get the best loan offer.
Here are a few factors that help improve the credit score quickly:
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Sufficient Bank Balance:
A sufficient bank balance indicates a borrower’s capacity to repay the loan, increasing their chances of getting loan approval. -
Stable Income Source:
A stable income measures an individual's ability to manage loan EMIs efficiently. Retain a steady job and avoid changing jobs before applying for a loan. -
Co-Apply:
Having a co-applicant with a good credit score will increase the chances of getting the best Personal Loans for bad credit. -
Make Regular Payments:
Repaying all outstanding balances, credit card bills, and current debts will improve the credit score and help get the loan approved. -
Reduce the Loan Size:
Since interest rates for small Personal Loans for bad credit scores are higher, borrowing the bare minimum will reduce the loan cost and ensure easy approval.
Don't let a bad credit score stand between you and your lending institution. Contrary to popular belief, obtaining online loans for bad credit is not impossible. All one has to do is be responsible with credit, manage their cards and loans properly, and use the tips mentioned in this article to get the necessary funding without hassle.
