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Personal Loan for Low CIBIL Score

A personal loan is a type of unsecured loan (given without the involvement of any collateral) that you can use to meet personal needs - to pay for vacation expenses, medical bills, marriage expense, etc. Lending institutions that offer personal loans take into consideration CIBIL score, among other factors, while determining the eligibility of an applicant. It has been observed that most financial institutions lend to individuals holding a CIBIL score of at least 750. However, there are instances where lenders extend personal loans to individuals with a low CIBIL score.

Why is CIBIL Score Important for Personal Loan?

A CIBIL score is a three-digit numeric that determines your creditworthiness. It ranges from 300 to 900, with 300 being the lowest and 900 the highest. The closer your score is to 900, the easier it becomes to avail loans from financial institutions. A CIBIL score below 750 is regarded as a low score, and banks are generally hesitant to sanction personal loans to people holding low scores since the risk of non-repayment is higher.

Personal loans are extended without a collateral, hence, CIBIL score matters a great deal. It tells the lender how much of a risk a particular applicant poses and whether or not to extend to the individual. CIBIL score is determined on the basis of your credit history - types of credit availed, repayment behaviour, etc. If you have always ensured timely repayments, then you will have a score on the higher side. However, if you have skipped or delayed payments, then your CIBIL score will be on the lower side. CIBIL scores give financial institutions an idea about the likelihood of an individual repaying a loan.

How to Get a Personal Loan with a Low CIBIL Score?

A low CIBIL score does not mean one will not receive approval for a loan at all, rather it will just be a little harder to convince financial institutions to extend credit. Here are some techniques on how you can get a personal loan with a low CIBIL score:

  • Include spouse or a relative as co-borrower - If one does not have a good credit score, consider using that of a working spouse or relative, if they hold a good score. When there is a co-borrower, the combined income also works in your favour, increasing your chances of getting a personal loan.

  • Get a guarantor - Having a guarantor for a loan means that if the borrower fails to make repayments on time, the guarantor will have to make up for the defaults. This gives assurance to the financial institution about repayment and reduces the possibility of default risk. It is advisable to find an individual with good credit score to act as a guarantor. A guarantor’s backing can help avail a personal loan despite a weak score.

  • Collateral loan - If a personal loan request does not get sanctioned on account of the CIBIL score, you can consider pledging an asset against the loan. The asset can be fixed deposits, jewellery, land, etc. In such cases, lenders will be quite willing to extend funds since there isn't any risk that has to be borne. Should you default, the lender can sell the collateral to recover the money that has been lent.

  • Enquire about tie-ups between employer and lending institution - If you work for a big corporate, there is a possibility that your company might have some kind of tie-ups with certain lending institutions as a part of corporate relations. Such an arrangement means that the lender will offer special facilities on loan and other facilities. This can help in availing a personal loan.

Effective Ways to Improve Low CIBIL Score

There are a number of reasons why a person's CIBIL score can be low. It can be due to outstanding credit card balance, applying for too many loans or credit cards, high credit usage and delay in payments, among other things. Now, the good news is that measures can be taken to increase this three-digit number. Here are some of the steps to take to enhance CIBIL score:

  • Keep the frequency of credit applications low - Every time you apply for credit, the financial institution will ask the credit bureau for the applicant’s credit report and a ‘hard’ inquiry will be recorded in the report. Each enquiry causes the score to drop by a few points. Therefore, it is recommended to only apply for credit from those financial institutions that you feel certain about gaining approval.

  • Pay off loans - In case there are loans whose payments have been delayed, you should make it a priority to pay the pending debts off. If you are having a hard time keeping up with the payments, then ask the bank for help with restructuring the debt to make the payments easier.

  • Hold a mixed bag of credit - Loans are of two kinds - secured and unsecured. If you hold too many unsecured loans, lending institutions tend to view it as a negative, thus raising the possibility of the application being rejected. It is suggested to hold a higher proportion of secured loans, like home loan or car loan, which will help raise CIBIL score, provided that payments are made on time.

  • Increase credit limit - A credit limit is the total amount that can be borrowed through a credit card. You can request the credit card issuer to increase the credit limit, but you need to make sure not to exhaust the entire limit. Until the credit rating reaches at least 750, it is recommended not to spend more than 50% of the credit card limit.

Frequently Asked Questions

What is a personal loan?

A personal loan is a type of unsecured loan (given without the involvement of any collateral) that you can use to meet personal needs - to pay for vacation expenses, medical bills, marriage expense, etc.

Why is CIBIL score important in availing personal loans?

Personal loans are extended without a collateral, hence, CIBIL score matters a great deal. It tells the lender how much of a risk a particular applicant poses and whether or not to extend to the individual. CIBIL score is determined on the basis of your credit history - types of credit availed, repayment behaviour, etc. If you have always ensured timely repayments, then you will have a score on the higher side. However, if you have skipped or delayed payments, then your CIBIL score will be on the lower side. CIBIL scores give financial institutions an idea about the likelihood of an individual repaying a loan.

How to get personal loan with a bad CIBIL score?

A low CIBIL score does not mean one will not receive approval for a loan at all, rather it will just be a little harder to convince financial institutions to extend credit. Here are some techniques on how you can get a personal loan with a low CIBIL score:

  • Include spouse or a relative as co-borrower - If one does not have a good credit score, consider using that of a working spouse or relative, if they hold a good score. When there is a co-borrower, the combined income also works in your favour, increasing your chances of getting a personal loan.

  • Get a guarantor - Having a guarantor for a loan means that if the borrower fails to make repayments on time, the guarantor will have to make up for the defaults. This gives assurance to the financial institution about repayment and reduces the possibility of default risk.

  • Collateral loan - If a personal loan request does not get sanctioned on account of the CIBIL score, you can consider pledging an asset against the loan. The asset can be fixed deposits, jewellery, land, etc. In such cases, lenders will be quite willing to extend funds since there isn't any risk that has to be borne.

  • Enquire about tie-ups between employer and lending institution - If you work for a big corporate, there is a possibility that your company might have some kind of tie-ups with certain lending institutions as a part of corporate relations. Such an arrangement means that the lender will offer special facilities on loan and other facilities.

What are the factors causing a low or bad CIBIL score?

The reasons for a low or bad CIBIL score are:

  • High utilization of credit limits
  • Outstanding credit card balance
  • Irregular payment pattern
  • Too many hard inquiries
  • Write-offs and settlements
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