If a borrower has a low credit score because of default then the chances of him getting a loan are lower. But if the score is low because of the less amount of loan that is taken or because the credit history is relatively recent then he can still get the loan.
With respect to the new lending base rate calculation formula, banks will act quickly while passing on any rate cuts to borrowers. But this is good news only if the borrower has a good credit history. Banks would neither lend the borrowers high amounts nor will they be able to switch lenders and take advantage of a rate cut if they have a poor credit score.
But, CIBIL data says 80 percent of the loans that get approved generally have a score above 750.However, credit score is not the only parameter which the lenders take into account for approval and for deciding the interest rates.
The difference in the interest rate that is paid by someone varies, depending on the product (either secured or unsecured loan), the size of the credit and the payback tenure. The difference will be bigger in cases where an unsecured loan is greater than secured loans. Someone who has a lower credit score can, however, avail secured loans like a home loan at the interest rate ranging anywhere between 11.50% and 18%. The rate may, however, jump a little (between 13 per cent-18 per cent) in cases of a loan against property.
The borrower will still be required to pay a slightly higher rate than someone with a good score. He may have to pay 11.14% rather than the usual 9.25% or 9.5% for a home loan. However, in addition to the credit default, say, if the borrower doesn’t have a stable income and he is self-employed, then the rate can go up to 19 percent and he will also have to approach an NBFC.
The borrowers with a low credit score, however, have options for them as well.
Non-Banking Financial Institutions (NBFCs) are more flexible with credit scores and cut-offs than banks since NBFCs have disbursed loans for a credit score as low as even 360, but the fact is that they also charge a higher rate than banks.
If a borrower has any asset, he can use it as collateral to get lower rates. However, the lenders do take loan protector policies into consideration, such as home loan insurance into consideration while sanctioning such loans. Gold loans or the loans that are received against property are better options.
Peer-to-peer, or, P2P, lending websites are also an option to get a loan if the borrower has low credit score. These sites provide small personal loans of up to Rs.5 lakh for tenures ranging from 12 to 36 months. The borrower can get these loans without any collateral at 12 to 24 percent, depending on how much one can negotiate. Although the profiles which have low credit score are scrutinized under strict process and there are better chances of not only getting funded but to get much lower interest rate.
However, there are many ways in which a borrower can negotiate.
A borrower shouldn’t go to a mainstream bank if his score is below 650. This will have a further negative effect on his score. Every time the borrower makes a loan inquiry, the lenders will pull out his credit report and all these requests get registered. Too many inquiries within a short time can have a negative effect on the score as well as makes lenders skeptical.
If the reason for his low score is a default, then it is a good idea to explain to the lender why he defaulted. Lenders generally don’t like to see a wilful default. Thus, as long as the reason is, say that the borrower lost his job. Or there was an emergency, a hospitalization, for which the borrower had borrowed and he couldn’t afford to pay back, if his reasons were genuine, the lenders sometimes excuse the borrowers and offer a lower rate. However, the borrower must make sure that all the other credentials are in order. He should have a stable job with a top-rated company, he must keep all his ITR filings in order. This is because the borrower might prefer a candidate who has been living at his current residence for at least 2 years. It helps if the default is at least 24 months old and he is applying for a secured loan. If he is looking for an unsecured loan like a personal loan some banks, on the mandate, want to have an existing relationship with them. If the borrower has had a healthy relationship, it will help him to negotiate better.
If the borrower is not in a hurry and has 6 to 7 months before he wants the loan, then there are some quick ways to improve his score too. Some banks like ICICI and DCB offer special products like secured credit cards against the deposits. They do not look at the score or income and his credit limit is based on the deposit which he makes. Once he starts using this card and makes repayments on time, then his score improves gradually. Another way is to try to get a small consumer durable loan.
This article has been contributed by Shruti Kakkar, Content Writer, LegalRaasta- an online platform for GST Software, Home Loan, Business Loan, Personal loan, TDS return etc.
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