With the increasing reliance on credit scores during the loan approval process, it is not difficult to understand that it is difficult to get a loan if you have a poor credit score. If the reasons behind the low credit score are genuine but temporary, you can perhaps try explaining the cause to the credit institution and try to reinforce faith in your repayment ability by showing supporting documents such as your salary statements, ITR returns, nature of employment etc. I am not sure if this will work but certainly worth a try. Going to a bank where you have a long relationship may also help. Do note too many loan applications will only result in multiple hard enquiries for your credit report. This may impact your score adversely.
Let’s assume you are finding it difficult to get a loan despite all the efforts. What will you do then? Is loan not an option for people with low credit score? Not really. There are many options available. And what might those types of loans be? Well, there are two ways in which this problem can be approached.
- Clearly, when the bank/NBFC does not want to lend to you, its primary suspicion is that you may not be able to pay back. And that is a fair point. Therefore, if there was a way for banks to ensure that their money can be recovered easily even if the borrower defaults, much of the concern about your repayment ability will go away. And one way to do that is to go for a secured loan. And the more liquid the security, the better it is for you. Please understand banks/NBFCs may still have some guidelines about minimum credit scores even for these loans.
- The other way is not to go to a bank for borrowing. You approach someone who is not as concerned about your credit score. I am talking about Peer-to-Peer lending.
Let’s discuss about these options in detail.
#1 Loan against Fixed Deposit
Frankly, this loan is more to build your credit score than to actually take a loan. You may be better off breaking the fixed deposits and using the funds for your needs. Taking a loan will unnecessarily entail high interest cost and ancillary charges. The only time it makes sense is when the loan amount is much lower as compared to fixed deposit and the interest rates have moved down sharply since you opened the fixed deposit. I have discussed various such aspects of loans against fixed deposit in this post.
#2 Loan against Gold
You can get loan up to 75% of the value of your gold. The loan tenure ranges from 6 months to 36 months. The entire loan disbursal process is likely to be quite quick and smooth. Do note you get loan only for the value of gold. Making charges of jewellery or value of studded stones is considered while calculating loan value. Your gold/gold jewellery is returned to you on repayment of loan.
There is a case that you may be better off selling your gold instead of taking loan against it. By saving those EMIs and ancillary charges, you can also buy your gold back. Makes sense. However, if we are talking about family gold or jewellery, it may have much emotional value and you may not want to part with it. Moreover, when you sell jewellery, you don’t get much towards making charges. If you have to repurchase such jewellery, it may cost you much more. Don’t make a purely emotional decision because if you are not able to repay the loan, you will anyways have to part with the jewellery.
#3 Loan against Life Insurance Policies
Many of us hold insurance policies and these polices can be used to generate quick cash. I am not talking about surrendering these policies but to take a loan against these policies. Do note these loans are available only against traditional life insurance plans. Unit linked insurance plans and term insurance plans are not eligible for loans. The loan amount is typically linked to surrender value of your policy at the time of loan application. Since the policy is assigned to the credit institution, the bank/NBFC may have the comfort in offering you the loan despite a low credit score. By the way, you can get loan against policies not just from the banks or NBFCs but also from insurance companies themselves. You can read about loans against LIC policies in great detail here.
#4 Loan against Securities
Though it is an option, you are probably better off selling those securities rather than taking a loan against them. Moreover, if you have money tied up in securities (and you don’t want to sell) and you have to borrow money from a bank, then you have not really planned your finances well. The only acceptable reason for me could be that your money is tied in illiquid instruments such as Fixed maturity plans. Personally, I wouldn’t hold back my investment to avoid paying capital gains tax. Read about such loans in detail here.
#5 Loan against Property
This is also an option but do not expect process to be swift. You can read about such loans here.
#6 Peer-To-Peer Lending/Borrowing
You are not borrowing from a bank or an NBFC. You borrow from individuals like you and me. Since you are dealing with individuals, they won’t have strict credit score rules and will take a call on case basis. Such loans are unsecured loans.
However, the P2P lending platforms have their internal credit rating mechanism (may also consider actual credit scores too). You may have to pay a very high rate of interest (up to 30% per annum or may be even higher). Add P2P platform charges to the interest cost and your actual cost will shoot through the roof. You need to see if that makes sense. After all, you need to pay back the loan too. In case you can’t pay, lenders do have a legal recourse against you. Moreover, your credit score will be adversely impacted. You can’t borrow more than Rs 10 lacs at any time across P2P platforms. I have discussed peer-to-peer lending and the RBI regulations on P2P lending in greater detail in another post.
Any loan that you take needs to be paid back in time. This is irrespective of your credit score. A good credit score may open more avenues for credit and perhaps even bring down the cost of credit. While taking a secured loan, work out the cost of loan and decide if it makes more sense to dispose off the asset or take a loan against it. You may be emotionally attached to the asset and may not want to sell it. However, if you can’t repay the loan, you will anyways have to part with it. One good thing with secured loans is that the interest rates may be on the lower side.
When it comes to an unsecured loan from P2P platforms, your hand is likely to be forced. You will perhaps approach a P2P platform only once you have run out of other options. Still, consider the overall cost and see if it is worth borrowing for the purpose.