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How to Get Loan with Bad CIBIL Score?

A CIBIL score is a three-digit dynamic number allotted to individuals and businesses by TransUnion CIBIL (Credit Information Bureau India Ltd.), previously known as CIBIL. It measures their creditworthinessto assess their loan eligibility. The CIBIL score is calculated through complex statistical analytics, based onvarious factors like credit history, number of existing loans, frequency of loan applications/rejections, timeliness of repayment of debts, etc.

A CIBIL score is evaluated on a scale of300 to900, with 900 being the highest and 300 the lowest. A score of at least 750, which is the minimum CIBIL score that a borrower generally needs to maintain for loan eligibility, is referred to as a good score.A bad CIBIL score adversely affects the prospects of loan approval. Even if a loan application is approved despite a bad CIBIL score, it is offered against a higher interest rate and may also be accompanied by strict terms and conditions.

The CIBIL report comprises of the score, summary and other essential information. Individuals need to access then CIR or Customer Information Report to see their CIBIL score, while businesses have to apply for CCR or Company Credit Report to view their score.

Factors Behind a Bad CIBIL Score

  • Missed payments : Non-payment or late payment of EMIs, loans and credit card dues is one of the primary factors that affect CIBIL scores. This reflects the borrower’s lack of financial planning or discipline that prevents him/her from making timely payments, making lenders question the prospects of retrieving the loan within the stipulated time.

  • Lack of healthy credit utilisation ratio : Neither too high nor too low credit utilisation ratio has a positive effect on the CIBIL score. The advisable usage ratio is usually 30% to 40% of the total credit limit. Exhausting the entire limit indicates financial stress. On the other hand, in contrast to the popular opinion that not using or minimal usage of credit cards repairs CIBIL scores, a low credit utilisation ratio also adversely affects the score.

  • Frequent loan applications : Applying for a loan while there are several other existing loans reflects on the borrower’s inability to maintain liquidity. Therefore, it is highly recommended that borrowers pay off an on-going loan and then wait for a few months before applying for another loan.

  • Recent loan rejections : A recent history of multiple loan and credit card rejectionsbring down the CIBIL score drastically. Under such circumstances, borrowers must stop applying for credit till the time the score has improved.

  • Type of loans applied for : You should have a good mix of secured and unsecured loans. Secured loans like home loans, loan against property, car loans, etc. are offered against a mortgage. This gives lenders the assurance that the assets mortgaged by the borrower can be sold for liquidity, in case of non-payments, enabling them to retrieve the loan amount. However, unsecured loans like personal loans, credit card due or signature loans are not offered against collateral. It is recommended that borrowers maintain a balance between secured and unsecured loans. Having too many loans of one kind is interpreted as the borrower’s inability to secure other types of loans, thus, affecting their CIBIL score.

  • Wrong details reported by banks or financial institutions : Inaccurate credit information reported to CIBIL by banks and other financial institutions may affect the borrower’s CIBIL score, preventing him/her from securing a loan that he/she could otherwise have availed. Maintaining a practise of checking the report at certain intervals, but not too frequently, is essential to detect errors, if any. This is especially important before applying for a loan or credit card. The borrower can raise a CIBIL dispute to correct the wrong information, which takes about a month to get resolved, and then apply for credit to enhance the chances of loan eligibility.

  • Settling credit cards : If you have settled a credit card i.e. if you have negotiated with the bank and closed a card after paying a sumless than what was due on it then your credit history will take a beating, making it difficult for you to avail credit later.

  • Too many enquiries : Applying for loans or credit cards simultaneously from multiple banks and other financial institutions is interpreted by lenders as desperation for credit. This adversely impacts the CIIBIL score.

Effects of a Bad CIBIL Score

A bad CIBIL score reflects poorly on your financial planning and discipline, making lenders sceptical about the prospects of retrieval of the loan amount within the pre-determined time. Here’s how it affects borrowers:

  • Difficulty in securing loans: A good score gives lenders some confidence about the probability of getting back the amount that they had offered as loan. A bad CIBIL score raises a red flag, minimising the possibility of loan eligibility, and even if a borrower gets a loan, it will be accompanied by stricter terms and conditions.

  • Loans against high interest rate: A good score places borrowers in a position where they can not only get loans without hassles, but a larger number of lenders would show their interest in offering a loan. What’s more, one can also negotiate and get a loan on a lower interest rate. On the other hand, a borrower with a bad CIBIL score will have to be content with the high interest rate offered by the lender.

  • Eligibility for low loan amount: Like in the case of the interest rate, a bad CIBIL score has an adverse effect on the loan amount as well. The borrower would have to settle with the loan amount offered by lenders, which will be comparatively lower.

Getting a Loan with a Bad CIBIL Score

A bad CIBIL impedes loan eligibility. However, there are other channels that can be explored to secure a loan despite a bad CIBIL score.

The following are some probable options:

  • Loan against collateral : The possibilities of loan eligibility with a bad CIBIL score can be improved by applying for a loan against collaterals like gold, assets, shares, FDs, etc.

  • Collaborative initiatives between employer and lender : Some organisations tie-up with lenders, providing benefits to their employees as well. Borrowers can make the most of this opportunity by approaching the lender that his/her organisation has tied-up with to improve the eligibility for a loan.

  • Joint loan application with spouse or family member : A borrower with a bad CIBIL score can apply for a loan with his/her spouse or family member with a good score. As the eligibility for the loan will be decided taking into consideration both the scores, the borrower will stand a greater chance of getting his/her loan approved.

  • A guarantor : Getting a family member with a good CIBIL score as a guarantor will improve the loan eligibility of a borrower with a bad score. This is because the family member’s score will be considered during the loan application procedure.

  • Alternative sources : Borrowers with a bad CIBIL score may approach financial institutions for a loan as there is a higher probability of securing a loan from them in comparison to banks. However, the loan will be offered at a comparatively higher rate of interest.

FAQs on How to Get Loan with Bad CIBIL Score?

How can I improve my CIBIL score to get a loan?

The following measures can be taken to improve CIBIL score:

  • Make the entire monthly payment pending against your credit card within the due date rather than paying just the minimum amount due. The remaining balance, when carried forward to the next month, attracts a heavy rate of interest, minimising your score.
  • Avoid using a credit card that has a low credit balance to prevent your CIBIL score from falling.
  • If you have an existing loan under your name, pay your debt within the expected date to improve your CIBIL score.
  • Give a standing instruction to your bank to auto-debit the loan/credit card amount against your name every month on a pre-decided date, so that you don’t miss payments. This date can be selected as per your convenience. Make sure to maintain the necessary balance in your bank account on the date every month as banks levy a heavy charge on every unsuccessful auto-debit.
  • Avoid transactions that reflect a poor credit history such as withdrawing cash against your credit card. This raises a flag for lenders as it indicates your current financial constraints.
  • Check CIBIL score and report before applying for a loan to make sure there are no inaccuracies, repetitions or omission of transactions. If you find errors or fraudulent transactions, you should raise a CIBIL dispute and get it rectified before applying for the loan.
  • Thoroughly read the loan document and clear all your doubts before signing, so that you are well aware of all the terms and conditions, and do not take steps that may adversely affect your CIBIL score.
  • Avoid being a loan guarantor. If the borrower defaults on payments, it will adversely affect your CIBIL score. Also, the concerned bank or financial institution might ask you to pay off the debt on behalf of your guarantor.

What should be my CIBIL score for becoming- eligible for a loan?

CIBIL scores are assessed on a scale of 300 to 900, with 900 indicating the highest and 300 the lowest. Borrowers generally need to maintain a score of about 750 for a quick loan approval. A middling score of 600 to 750 reduces your prospects of securing a loan. Lenders may evaluate the creditworthiness of a borrower based on other parameters like monthly income, employment stability, other current loans, etc. With a bad CIBIL score between 300 and 599, it is usually difficult for a borrower to get a loan unless it is offered against collaterals like gold, shares, assets and FDs.

Besides the score, what are the factors that lenders consider while analysing loan eligibility?

Lenders analyse home loan eligibility on the basis of the following factors:

  • Payment history – Lenders check frequency of missed payments and defaults, which is a proof of bad credit history.
  • Income and employment status – These details help the lender assess the borrower’s ability to repay the debt.
  • EMI to income ratio – Borrowers have a higher chance of securing a loan of an EMI that is not more than about 50% of his/her monthly income. This will be lower if the borrower already has other loans under his/her name.
  • House location – Some lenders may analyse loan eligibility based on the location of the house for which you want the loan.
  • Account Information – Lenders thoroughly analyse the number of suits and those written off, if any.