June 20, 2023 · 12 mins read

Strategies and Options for Getting a Loan With Bad Credit in India

Liyana Eledath

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Do you know that over 15% of the Indian population has a bad credit score? According to a credit information company's report, approximately 480 million Indian adults under 65, which constitutes around half of the earning population, are credit unserved.

A low credit score can limit your financial opportunities, especially when it comes to borrowing money. Banks and financial institutions typically use credit scores as a primary tool to determine the creditworthiness of an individual or business. A low credit score indicates a higher risk of defaulting on a loan, making it difficult to obtain financing. However, all hope is not lost.

What Counts as a Bad Credit Score in India? Meaning & Minimum Cut-Offs

Whey you want to apply for loan with bad credit, then the bad credit score often indicates risks with approving your loan and credit card applications. Because credit scores help to determine your creditworthiness and trustworthy of repaying the amount on time. When this score is bad or lesser, it shows a high risk associated with your credit profile.

In general, a credit score of 650 and below is considered as a bad score in India. Let’s check the minimum cutoffs for the bad credit score:

1: A score of 650 and below that are generally considered as a bad credit score.

2: The value below 500 are very poor credit score and there are less chances for your loans and credit card requests to be approved.

3: Below 300 shows high risks to lenders to approve your loans or credit cards since it says your weak repayment status.

Bad Credit in India: Understanding the Landscape

In India, agencies like Experian, CIBIL and Equifax asses an individual’s creditworthiness using credit scores. Typically, a credit score ranges anywhere between 300 to 900 and a score above 700 is considered good and below 650 is considered bad. Late payments, defaults in loans, high credit utilisation and multiple rejections in credit applications can result in a bad cibil score. Some of the challenges of a bad credit score are:

1: When it comes to loan approvals, lenders see a low cibil score as a red flag, which will eventually lead to a rejection of the loan application.

2: Despite of low score, if loans are approved, they come with a higher rate of interest For those with low cibil scores, banks may deny offering credit cards.

3: There are strategies and options available for individuals in India with bad credit to help them get the loan they need.

1. Correct credit report errors, if any:

Often, the credit bureau makes errors and mistakes on the credit report. Credit report mistakes can lead to a poor credit score, affecting credit possibilities. You should check your free credit report regularly to see if there are any errors or mistakes to report and dispute any errors or inaccuracies that may negatively affect your credit score.

2. Improve your credit score:

The first step to getting a loan with bad credit is to work on improving your credit score. You can do this by paying off any outstanding debts, making timely payments on your bills and credit cards, and avoiding applying for multiple loans or credit cards. You can also check your credit score for free on ZET. If you have a bad credit score you can try a secured credit card. This can help you improve your credit score quickly fast.

3. Look for alternative lenders:

Traditional banks and financial institutions may be reluctant to lend to individuals with bad credit. However, there are alternative lenders who may be more willing to work with you. These options include peer-to-peer lending platforms, online lenders, and credit unions. While the interest rates may be higher, these options can be a viable solution if you need a loan quickly.

4. Consider secured loans:

Secured loans require collateral, such as a car, gold, or property, in order to secure the loan. Since the lender has collateral to fall back on if you default, they may be more willing to lend to someone with bad credit. However, it's important to remember that if you do default, you may lose your collateral.

5. Find a co-signer:

If you have a friend or family member with a good credit score, they may be willing to co-sign a loan with you. This means that they will be responsible for paying the loan if you cannot. If an individual has a low credit score, having a co-applicant with a high credit score can improve their chances of getting approved for a loan. However, it's important to remember that if you default, it will negatively affect their credit score as well.

6. Apply for a loan with a guarantor:

Some lenders may allow you to apply for a loan with a guarantor. A guarantor is someone who agrees to pay the loan if you cannot. Finding a guarantor for loans can be a good solution if you don't have collateral or a co-signer.

7. Look for government schemes:

In India, there are several government loan schemes that are designed to help individuals with low income or bad credit. These include the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

8. Peer-to-peer loan:

Peer-to-peer lending is a different way to borrow money without involving banks or traditional lenders. Instead, you borrow directly from individuals or groups of individuals who are willing to lend you money, usually through an online platform. ZET app is a convenient collective platform that allows individuals to obtain loans from various popular peer-to-peer platforms, without the need for a good credit score or collateral.

It may be possible to get lower interest rates with compared to traditional loans, although this will depend on how low your credit score is. It is possible that individuals with extremely low credit scores may not meet the eligibility criteria for this kind of loan.

9. Ask for a lower personal loan amount:

While having a poor credit score can make it difficult to get approved for a loan, it is still possible to obtain it even with bad credit by requesting a lower loan amount. This approach can help to minimize the risk of default for the lender, as they are lending out a smaller sum of money.

Getting a loan with bad credit in India can be challenging, but it is not impossible. Explore these strategies & alternative options that can help in getting the finance you need with a bad credit score. However, the best and recommended way is to improve your credit score over time and then apply for credit.

How Does a Low Credit Score Affect Your Loan Approval Chances?

Having a lower credit score means there are lesser chances for your loans to get approved. The banks and financial institutions will see your lower score as a financial risk and might consider you as a high-risk borrower.

Even though they are approving your loans, you will face other issues like higher interest rates, smaller loan amount and very strict terms with your loan. In some cases, you might need a co-signer or a collateral to approve your loan. To avoid such additional risks, you can try to increase your credit score.

Can You Get a Loan With Bad Credit? Key Methods Explained

If you need loans for bad credit scores in India, then it is yes that there are some alternate options for you to avail a loan with a bad credit score. It includes:

1: Applying for a secured loan with fixed deposits.

2: Applying with collaterals like property, gold or any form of assets.

3: Having a co-signer or a guarantor with a high credit score to approve your loan.

4: By providing a valid proof for your stable income and with that you are capable of repaying the amount on time.

5: You can also try choosing a smaller loan amount for quicker approval.

Loan Options for Individuals with Bad Credit

There are certain loan products available for individuals struggling with a low credit score:

Secured Loans - Lenders offer loans with collateral, like gold loans, loan against Fixed Deposits, and loan against property for individuals with a low credit score.

NBFCs and FinTechs - While traditional banks deny personal loans, NBFCs and FinTechs will be more than willing to offer loans to individuals with a low cibil score, with a higher interest.

Employer salary advance - Some companies give salary advances to employees with a low interest rate and will deduct the same on a monthly basis from the salary.

Government schemes - For small business owners with a low cibil score, initiatives like the Pradhan Mantri Mudra Yonjana PMMY) help meet their requirements.

Strategies to Improve Loan Approval Chances

Despite of having a low cibil score, individuals can still take steps to increase their chances of getting loans:

1: Banks might approve smaller loans for individuals with low cibil scores.

2: Providing a collateral against the loan can reduce lender risks, leading to higher chances of approval.

3: A co-applicant with a good cibil score and strong credit history can improve the odds.

4: Providing proof of income such as salary slips, business returns, IT returns will assure lenders of the individual’s repayment capacity

Exploring NBFCs and FinTech Lenders for Bad Credit Loans in India

When your banks reject your loan applications for extremely bad credit loans in India, there are several NBFCs (Non-Banking Financial Companies) and FinTech lenders who might provide you with the loan. Instead of focusing only on credit score, they will check your income, employment status and your digital transactions to check your creditworthiness.

Depending on those factors, they will help you with loans. Some of the famous lenders in this category include MoneyTap, EarlySalary, and KreditBee. However, you need to check their terms and conditions because sometimes they might have higher interest rates, shorter repayment times or any hidden charges.

How Secured Loans Can Help: Using Collateral to Get Approved

Using secured loans can help you get the loan quicker and can sometimes neglect your bad credit score. The lenders will be rest assured about the risks of providing you the loans because with collaterals like your property, gold or fixed deposits, they can be confident that you will repay the amount.

Failing to repay the amount will lead to the loss of your collateral to the lenders. So, you need to be extra careful when you are applying with any of your assets as your collateral loans.

Rebuilding Your Credit Score: Long-Term Solutions

Pay bills on time - Late payments will impact credit scores. So setting up auto-debit options for payments will ensure that bills are paid on time.

Reduce your Credit Utilisation ratio - Credit card usage below 30% of the available maximum limit will positively influence credit scores.

Secured Credit Cards - Credit cards against fixed deposits display responsible credit usage.

Avoid Multiple Credit Applications - Each enquiry on a loan or credit card application can temporarily reduce credit scores.

Check Credit Reports - Checking credit reports regularly can help correct inaccuracies which can drag scores down.

Clear Debts - clearing pending debts and prioritising repayments can boost credit scores over time.

Frequently Asked Questions:

What is a bad credit score in India?

A bad credit score in India is generally considered to be a score below 600. However, this can vary depending on the credit bureau and the lenders’ policies.

What does "credit unserved" mean?

Credit unserved refers to individuals or businesses that do not have access to formal credit facilities or have limited access to such facilities due to factors such as a lack of credit history, low income, or a poor credit score.

What’s the lowest credit score accepted for personal loans in India?

The lowest credit score preferred by most of the banks and lenders include the credit score of 700 and above. However, some of the fintech and NBFCs will accept personal loans even if your credit score is below 500. This is because they will check other factors like your income, employment and digital transactions for your creditworthiness.

Do all banks and NBFCs offer loans to people with bad credit?

No, not all banks are approving loans for people with bad credit score. In most of the cases, they are rejecting the applications if the credit score is lesser and bad to avoid any risks. But the NBFCs and fintech lenders will mostly offer loans though your credit score is bad. To equate the risks associated, they will come up with high interest rates and shorter repayment period, making it poor credit loans in some cases.

What kind of collateral can I use to get a loan if my credit score is low?

When your credit score is low and bad, you can apply for a loan with your collaterals or assets. Those include your gold, property, fixed deposits, paid-off vehicles, real estate, inventory, business assets, your savings in your savings account and more.

Does applying for multiple loans hurt my credit even more?

Yes, when you are applying for multiple loans in a short period of time, it can significantly affect your credit score negatively and can reduce it. This is because each application needs a hard inquiry by the lenders to check your background and credit history. It can lower your score and several applications can refer to your credit need and make it risky for lenders to approve it.

How much higher is the interest rate for bad credit loans?

The maximum limit interest rate for the bad credit loans can be up to 30%. Because, it will be usually 3 – 10% higher than the standard loan rates. The percentage is really based on the lender and it can range from 18% to 30% due to the risk associated with approving your loan.

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