What is the first thing that one must do if one is planning to take a car loan, home loan or a personal loan? It is to find out the eligibility criteria for the loan and the factors that the lenders consider to evaluate the loan application. For example if one is planning to take an HDFC personal loan, there are certain requirements relating to the age, income, employment status and CIBIL score of an applicant that he must meet in order to get a particular loan amount sanctioned. These factors help the lenders to understand the financial standing and the ability of a person to repay the loan.
Credit score has become a very important tool that is checked by all lenders before taking an approval decision. This score is calculated by the credit bureaus using a credit scoring model. Each of the bureaus maintains a record of the loan repayment behaviour of borrowers who have either taken a loan or a credit card from the financial institutions that report to them. The lending institutions provide a periodic update to the bureaus. The information recorded in the credit report forms a basis for calculating the score. This score is used by prospective lenders as it reflects the credit handling behaviour of the borrowers.
The credit score usually ranges between 300 and 900. Lenders usually sanction loans to applicants who have a score of more than 750. A high credit score indicates that the person has repaid the EMIs and credit card bills on time. If a person is not diligent with his payments his name may enter loan defaulters list and cause a severe drop in his score. Hence a low credit score is seen as a high risk proposition by the lenders and they reject such applications.
People who haven't availed for any form of credit till now will not have any credit history or score. In the absence of any credit score, banks find it difficult to evaluate whether the person is worthy of giving credit or not. They may either reject your credit application or charge a very high interest rate. This becomes a vicious cycle as you need some form of credit approval in order to present that you can handle credit responsibly.
So before you apply for a loan, you must check your credit score, to know about your own credit standing. Every person who has some form of credit history is entitled to a free credit report from each of the bureaus every year. Apart from assessing the probability of getting a loan approval checking your report also helps in uncovering errors and identity theft issues.
But improvement in credit score requires time, discipline and patience. If there is a financial emergency and you cannot wait for the credit score to improve you can consider following alternate options.
Apply with NBFCs – Sometimes NBFCs do not follow stringent rules of eligibility. They are more flexible when it comes to the criteria related the credit score.
Peer to peer lending- Peer to peer lending is the best alternative option when you have a low credit score. Here you get small personal loans of Rs 5 lakhs without any security deposit for a tenure ranging from 1 to 3 years. Several other factors apart from the CIBIL score are considered to determine the eligibility for the loan. But the rate of interest charged is a little higher.
Joint loan with spouse- If your spouse has a good credit score, you can ask him/her to co-sign the loan with you to enable you to borrow funds. A good credit score of the co-signer helps in mitigating the risk of the lender and increases your chances of approval.
Secured loan- If you have an asset, you can use it as collateral to win the trust of the lenders. Gold loan and loan against property are good options of secured loan.