In India, personal loans are distinguished into several categories, based on an individual’s financial needs. Before approving of any loan, banks in India, both public and private ones look at a candidate’s CIBIL score to determine their creditworthiness. This article aims to educate you on how to get personal loan with a low CIBIL score and what you can do to improve/maintain a healthy CIBIL score.

What is CIBIL score?

CIBIL scores are three-digit numbers with 300 being the lowest and 900 being the highest score. A  score of 700 and above is a good CIBIL score to avail of personal loans from banks and other financial institutions. The following interpretation will help you understand CIBIL scores.

750 and above – Very good. Eligible to apply for any loan at reduced interest rates.

650 to 750- Good. 

550 to 650 – Average

300 to 550 – Poor.

Personal Loans for Low CIBIL Score

In India, loans are categorized depending on their nature. Some loans require collateral while some don’t. Following loans are some of the most sought-after in India.

Secured loans: These loans are lent by banks if borrowers have some collateral to pledge. The value of the collateral depends on the loan amount. In the case of secured loans, if candidates possess valuables like gold or land whose value is equal to or higher than the loan amount, it is still possible to get these loans with a low CIBIL score. However, your co-applicant’s CIBIL score must be on the higher side. Since secured loans come with a lower risk than the other types of loans, banks and financial institutions approve them if you have sufficient collateral to pledge and a co-applicant with a higher CIBIL score.

Unsecured Loans: Unsecured loans refer to loans that do not require collateral. One can avail of unsecured loans even if they do not possess valuables like gold or land. However, note that banks and financial institutions consider these loans, high-risk.  Hence, most government banks have a cap on unsecured loan amounts. Private lending institutions offer unsecured loans at increased interest rates. However, your co-applicant must have a high CIBIL score.

Peer-to-peer loans: P2P loans connect lenders directly to borrowers. Certain lenders may even allow borrowers with low CIBIL scores to borrow loans but the transaction comes with high risks and heavy interest rates.

Payday Loans

  • Payday loans are short-term, high-interest loans provided by private financial institutions to those looking for urgent loans.
  • Payday loan providers offer loans to bad credit holders. However, these providers should be your last resort. 

Co-operative Societies: Financial co-operative societies lend money on trust. Hence, if you have a low CIBIL score, consider borrowing from a cooperative society. However, their loans come with high interest rates.

Eligibility Criteria for Loans With Low CIBIL Score

For Secured Loans: 

  • Since secured loans involve collateral of the same value as the loan amount, the co-applicant must have a CIBIL score of 700 and above. 
  • Having a co-applicant/co-signer with a higher credit score can significantly improve the chances of loan approval for someone with a low CIBIL score.
  • If you are pledging collateral, its value should equal or exceed the loan amount. This may also qualify you for lower interest rates.

For Unsecured loans:

  • Getting unsecured loans is difficult to obtain for those having a poor CIBIL score. However, it is not impossible.
  • Certain private banks and NBFCs (Non-Banking Finance Companies) in India provide unsecured loans to applicants with a CIBIL score of 500 and above. 
  • Applicants with low CIBIL score must name a co-applicant with a good score. Banks also look into the income to debt ratio of the co-applicants. 

Peer-to-peer lenders

  • In the peer-to-peer lending system, a loan is lent by individuals rather than institutions. Hence, there is little requirement for a good CIBIL score in this system.
  • Peer-to-peer lenders are a good option if there is mutual trust between the lender and the borrower.

Payday Loans

  • They do not have stringent eligibility criteria and the loans are processed within a day. However, they come with their fair share of drawbacks. 
  • These providers’ lending terms and conditions may require applicants to pay high processing fees, higher interests or even pledge assets while borrowing loans.

How a Low CIBIL Score Affects Loan Approval?

Most Indian banks look at a person’s CIBIL score to determine how likely they are to repay the loan before they approve of any. With cases of bad loans on the rise, Indian financial institutions have tightened the prerequisites for loan applicants. So if you have a CIBIL score lower than 700, getting a loan could be difficult but not impossible. There are ways in which you can still manage to get that personal loan approved even if your CIBIL score is low.

Creditworthiness: A low CIBIL score indicates poor creditworthiness. This raises a red flag for banks and financial institutions who lend personal loans.

Interest rates: If you have a low CIBIL score, chances are high that you may not get to avail personal loans at lower interest rates. Low CIBIL score personal loans come with high interest rates.

Loan amount: For people with poor CIBIL scores, getting the maximum loan amount can be a challenge. Lenders are hesitant to give higher loan amounts to those with bad credit scores.

How to Build a Good CIBIL Score?

Now that you have had the chance to read about the various loan types, you might realise how important it is to have a good CIBIL score. Once you start borrowing credit, here are a few best practices to ensure a healthy credit score.

Ensure timely repayment: Late payments can adversely affect your chances of maintaining a healthy CIBIL score. Ensure regular payment of your credit card bills to avoid a fall in your CIBIL score.

Monitor your credit card report:  Credit card statements are your gateway to understanding the system. Having a credit card may seem like you have a genie but if misused, this can affect your CIBIL score adversely. 

Utilise less credit: Regardless of the credit limit your bank offers, remember that exhausting your card’s credit limit also brings the CIBIL score down. So the next time you think of buying the latest phone in the market, set a clear proportion of cash and credit to avoid CIBIL score issues.

Avoid applying for too much credit within a short period of time: This reflects poorly on your CIBIL score and credit report. Frequently relying on credit is an indication of unreliable finances. This raises a red flag and is immediately visible on your credit report.

Avoid maxing out your credit cards: Maxing out credit cards too often can lead to a downfall in CIBIL score. This creates a poor impression of your spending habits.

CIBIL scores and credit reports are indicators of your financial health. A low CIBIL score affects loan approval. Hence, it is crucial to take note of your transactions and balance any discrepancies to restore your score. The eligibility criteria for loans with low CIBIL score are stringent due to increasing cases of bad loans. If your credit score is affected due to unavoidable reasons, it is better to name a co-applicant with a fairly good score. This can improve your chances of getting loans at low interest rates. Alternatives to personal loans from banks are peer-to-peer lenders and payday loan providers. However, it is advised that you proceed with caution before approaching them.

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