Your credit score—also known as your CIBIL score—plays a significant role in determining your eligibility for a loan in India. A CIBIL score of 750 or more might lead to favourable loan terms and interest rates, whereas a score of less than 650 may cause problems. That being said, a low CIBIL score does not mean you have few options. Join me as we explore the financing choices available to those with less-than-ideal credit ratings and what low-CIBIL loans imply.
Knowing Your CIBIL Score
A three-digit numerical summary of your credit history, the CIBIL score, is calculated using data from your Credit Information Report (CIR). Higher scores suggest greater creditworthiness. This score runs from 300 to 900. Every loan provider in India uses this score to evaluate the risk of making a loan to a borrower. Late payments, defaults, excessive credit utilization, and several unsecured loans can all contribute to a bad score.
The Consequences of a Low CIBIL Rating
Increased Interest Rates:
Interest rates have been raised by the Indian loan provider in order to mitigate the higher risk involved in making loans to applicants who have low CIBIL ratings.
Loan Rejections:
Due to stringent cutoffs, a large number of traditional banks and financial institutions may deny loan applications from borrowers with poor credit ratings.
Lower Loan Amounts:
Borrowers with poor CIBIL scores may obtain smaller loan amounts than necessary, even if their applications are accepted.
Stricter Terms and Conditions:
The loan provider in India may set more restrictive conditions, such as the requirement for collateral or shorter payback periods.
Despite these challenges, a number of funding sources are available to help people with low CIBIL ratings get the loans they need.
Financing Options for Borrowers with Low CIBIL
1. Secured Loans
Secured loans are backed by collateral, which reduces the risk to the loan provider in India and makes it easier for those with low CIBIL scores to obtain credit. The following are typical kinds of secured loans:
LAP (loan against property):
Your home or business property may be pledged as security for a loan. This kind of loan lets you borrow a significant amount depending on the value of the property and often has cheaper interest rates than unsecured loans.
Gold Loans:
If you have a low CIBIL score, pledge your gold assets. Yes, you heard it right. Your gold assets can help you secure a loan. We all know that gold is a high-value security and holds lower interest rates. Thus, loans secured by it are usually simpler to get.
Loans secured by fixed deposits (FDs):
You may be able to obtain a loan by using your fixed deposit as collateral. The interest rate is often modest and the loan amount is expressed as a percentage of the FD value.
2. Co-signed Unsecured Loans
Having a co-signer with a strong CIBIL score may significantly boost your chances of being approved for an unsecured loan. By accepting the co-signer’s pledge to repay the loan in the scenario you default, the lender lowers their risk. Better financing terms and reduced interest rates might result from this arrangement.
3. Personal Loans from Fintech and NBFC Businesses
When it comes to lending rules, fintech and non-banking financial businesses (NBFCs) typically provide greater freedom than traditional banks. They might be able to offer personal loans to those with poor CIBIL scores, albeit usually at higher interest rates. In addition to your CIBIL score, these groups may consider other variables, including your present salary, job stability, and general financial well-being.
4. Loans from peer-to-peer (P2P)
P2P lending services bypass traditional financial institutions by connecting borrowers and independent lenders directly. Even though interest rates could differ significantly depending on the perceived risk, these platforms might provide loans to those with poor CIBIL ratings. With P2P lending, you have the rare chance to bargain directly with lenders for better loan terms than you might get from banks or non-bank financial institutions.
5. Cooperative banks and credit unions
Cooperative banks and member-owned credit unions often have lower lending interest rates than commercial banks. Members with low CIBIL ratings may have a higher chance of receiving loans from them if they consider variables other than credit score. Developing a rapport with these organizations may result in healthier loan conditions.
6. Raising Your CIBIL Rating
While applying for loans with a low CIBIL score is still possible, improving your score over time may open up more favourable lending options. The following advice is provided:
On-Time Payments:
Making on-time bill payments is one of the most crucial things you need to think about. Whether it’s an EMI, credit card bill, or other payment, make sure you pay it on time.
Credit Utilization:
The difference between the amount of credit you use and the amount that is available to you is called your credit utilisation ratio; aim to keep it below 30%.
Avoid Applying for Too Many Loans:
Okay, here is something that you need to pay attention to. If you are applying for too many loans, you need to stop this activity right away. Attempting too many loans at once may hurt your credit score.
Debt Consolidation:
Want to organize your finances? I suggest you combine multiple loans into a single loan at reduced interest rates. Combining them will help you manage your repayments.
Keep an Eye on Your Credit Report:
Lastly, always monitor your credit report and see whether there are any errors or discrepancies. If you find any mistakes, report them to CIBIL for correction.
The Bottom Line
In summary, I would say even if you have a bad CIBIL, there is good news for you. You can still grab the opportunity to get a loan in India. Yes, that’s true. It’s not an impossible thing at all. P2P platforms, alternative lenders, and secured loans are just a few of the funding options that can be chosen to meet your needs. Additionally, improving your CIBIL score over time will make you eligible for better loan terms and interest rates.
Note—Every loan provider in India has different approval requirements for your loan application. One thing that you have to remember is that overall financial health plays a significant role in their decision. So, it is advisable to locate a good loan solution that fits your budget. Explore the options outlined above and take action to improve your creditworthiness.
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