A credit score is the most important measure of a person’s creditworthiness. It helps a lender to evaluate a person’s capability to repay a loan. A credit score is a number ranging between 300 to 850 and is based on an individual’s credit or repayment history.
From the borrower’s perspective, a good credit score is considered helpful in getting a loan sanctioned easily. However, sustaining a good credit score is not an easy task, as it takes financial management skills, sufficient cash flow, and a great deal of discipline to duly pay off debts and expenses on time.
Nevertheless, you can get a loan regardless of a low credit score. All you have to do is adopt a bunch of good practices while applying for and repaying the loan. On that note, let’s talk about some measures you can take while applying for a loan with a low credit score to increase the chances of it being approved.
Navigating Loan Eligibility With a Bad Credit Score
Apply for a Smaller Loan Principal
As someone with a poor credit score, opting for small loans like a personal loan is a viable solution. This makes the amount easy to repay over time. However, you must ensure that you repay all your instalments on time to consecutively improve your credit score.
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By doing this, you can build up your trustworthiness and can eventually apply for a bigger loan from a financial institution such as a bank or an NBFC (Non-Banking Financial Company). You can also visit peer-to-peer lending websites where you can directly connect with lenders who are willing to offer qualified applicants small loans for bad credit.
On the other hand, if you go to a lender and ask for a high loan principal with a poor credit score, the lender might view you as a candidate with high risk and as someone with a high probability of defaulting on your payments.
Add a Guarantor or Go for a Joint Loan
Applying for a joint loan is a better option to get your loan approved despite a low credit score. You can partner with someone, such as a family member who has a good credit score to do so. This improves your chances of getting a loan approved, as this gives the lending authority a sense of assurance.
Another way to get a loan if you have a low credit score is to get a guarantor. A guarantor is a person who pledges to pay off a borrower’s debt if he/she fails to fulfil his/her loan obligations. This enhances your eligibility for a loan as a guarantor with a higher credit score takes the responsibility of repaying it in case of any default. Furthermore, it mitigates any credit risk for the lending authority.
Consider NBFC or Peer-to-Peer Lending Sites
Various banks conduct financial inquiries to check for your creditworthiness. These inquiries are strict, and through these inquiries, banks acquire your credit records from credit agencies which could lower your credit score.
In such a case, you must consider applying for a loan from NBFCs (Non-Banking Financial Companies) instead of banks, as NBFCs have more flexible guidelines and policies for people with lower or no credit ratings. However, these financial institutions charge a higher rate of interest than banks.
Another easier way to secure a loan with a low or no credit score is by visiting Peer-to-Peer lending platforms. Apart from the paperless transactions, these P2P platforms offer loans at a competitive rate of interest than NBFCs.
Have a Discussion With Your Lender
Discussing past financial hardships that have caused a decline in your credit score with your lender is a good idea. This could help you in securing better loan terms with a low credit score.
Furthermore, you can also improve your chances of getting a loan by disclosing evidence of steady or additional income such as a secure job, salary hike, and more. This will help the lender develop trust in you, and he/she could consider approving your loan.
Lastly, if you have a poor credit record, you can opt for a credit builder card. Credit builder cards are credit cards specially designed to rebuild your credit record if you have a poor credit score.
These credit cards are particularly popular here in th UK, and an individual residing here and thinking about improving his/her credit score can check the eligibility and best deals online with the credit builder card UK.
Update Your Credit Report and Resolve any Errors
Make sure to keep your credit reports updated and free from errors. At times, you may go through several hardships while getting a loan with a low credit score. However, sometimes this decline in your score could be because of some errors in your credit report. At times, it also happens because your report is not updated to the latest entry.
Although this is not your fault, lapses like these can lead to undesirable issues. To avoid this problem, make sure to regularly review your credit score. If you discover any discrepancies, make sure to inform the authorities responsible and have them resolved as early as possible.
This will only work in your favour by improving your credit score and in turn, make you a creditworthy applicant for a loan.
Broaden Your Loan Search Options
A person opting for a loan must expand his/her horizon of search options. This is because different banks and financial institutions have different credit score cut-offs, below which they don’t grant loans. Some set a high credit score cut-off for approving loans, whereas others may grant you a loan at a low credit score but can charge a higher interest rate.
One of the best ways to broaden loan search is to visit online financial platforms where various lenders offer loans based on multiple factors such as credit score, income, job profile and more.
Conclusion
While the measures mentioned above may help you secure a loan even when you have a poor credit score, you still need to have a plan and a steady income source to repay the loan on time. In case you default, your credit score will plunge further.
Therefore, micromanaging your financial status and credit score is key to keeping yourself on track to improving your score.
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