Can you get personal loan with bad credit score? Here’s how to make it happen

To get a personal loan, an individual has to fulfil the eligibility criteria. The applicant’s age should be within the specified age bracket; income should be higher than the specified minimum amount; should have a stable career with specified minimum work experience; the credit score should be equal to or higher than specified, etc.

Banks usually consider a credit score of 750 and above a good score to approve a personal loan, provided the other eligibility criteria are fulfilled. That does not mean an individual with a lower credit score will not get a personal loan. In this article, we will discuss some of the ways in which an individual with a lower credit score can get a personal loan.

Have a guarantor or a co-applicant

As a personal loan is an unsecured loan, you cannot bring in any collateral or asset to take a loan against its security. If your credit score is lower than the minimum required by the bank, consider bringing in a guarantor or a co-applicant to strengthen your case. Bring in a guarantor or a co-applicant who has a good credit score, a stable income source, and fulfils the other eligibility criteria.

Maintain a low debt-to-income ratio

The debt-to-income (DTI) ratio measures the amount of monthly income being used to pay loan EMIs. For example, Reena has a monthly income of Rs. 50,000, and Rs. 10,000 is going towards paying loan EMIs. In this case, Reena’s DTI is 20%. Banks consider a DTI of 35% or lower as good to approve loan applications, provided other eligibility criteria are fulfilled.

Some banks consider a DTI ratio between 36% to 50% for approving loan applications on a case-to-case basis, provided the other eligibility criteria are firmly in favour. So, if your credit score is lower, strengthen your other eligibility criteria like having a lower DTI. Ensure your DTI is lower than 30% so that it convinces the bank that your loan repayment ability is strong.

Prove to the bank that your income can support EMI payments

If your salary has increased recently, share the proof with the bank. If you have any additional sources of income, share the details with the bank. The increase in income and additional sources of income can help convince the bank that you can easily manage to pay the personal loan EMIs. It will increase your chances of the loan application getting approved.

Ask the bank to lower the loan amount, if required

With a lower credit score, the bank may find your current personal loan application risky, and hence unwilling to approve it. Check with the bank if a lower loan amount can be approved. The bank may view a lower loan amount as relatively less risky, and may consider approving it.

Take a secured credit card against an existing fixed deposit

Apart from personal loans or any other loans, a good credit score is required for credit card applications as well. If you have a low credit score and want to get a credit card, you can go for a secured credit card. Some banks issue secured credit cards against the security of a fixed deposit. The credit limit on such credit cards usually ranges between 80 to 100% of the fixed deposit amount.

Suggestions to improve credit score

In the above section, we have understood how to get a personal loan with a lower credit score. However, banks usually consider such loans risky and charge a higher interest rate than others. Once you get the personal loan, you should work on improving your credit score so that you don’t have to pay a higher interest rate on future loans or face rejection. Some of the suggestions include the following.

Make timely payments

The credit information companies (CICs) like CIBIL consider various factors to calculate the credit score. Within these, the timely payment of loan EMIs and credit card monthly bills has the highest weightage. So, to build and maintain a good credit score, you must ensure timely payment of loan EMIs and credit card monthly bills. You should opt for auto-debit or set reminders for timely payment.

A low credit utilisation ratio

The credit utilisation ratio measures the percentage of credit limit used from the total available limit. For example, Sheena has a credit card with a credit limit of Rs. 1 lakh. In the November cycle, her credit card bill was Rs. 10,000. Thus, her credit utilisation ratio was 10%.

A credit utilisation ratio of 30% or less contributes towards increasing your credit score. Hence, always aim for a credit utilisation ratio of 30% or lower. If you regularly cross that limit, ask the bank to increase your credit limit. A higher credit limit and the same monthly expenses on the credit card will bring down the credit utilisation ratio. If your income has increased recently, share the latest salary slips with the bank and request for a credit limit enhancement.

A healthy mix of secured and unsecured credit

Always aim for a healthy credit mix of secured loans (home loans, vehicle loans, etc.) and unsecured loans (personal loans, credit cards, etc.). A diversified credit mix contributes positively towards increasing your credit score.

Make one credit application at a time

If you make multiple loan or credit card applications at the same time, banks treat it as credit-hungry behaviour. It will result in multiple credit inquiries, resulting in lower credit score and rejection of credit applications. Hence, you should always make one credit application at a time, wait for the bank’s final decision before proceeding with the next application.

Retain old credit cards for ageing

The older a credit card, the higher the ageing, and the better it contributes towards improving your credit score. Hence, if you have an old credit card that you are not using, still consider keeping it open. You may transact using it occasionally just to keep it active. If such credit cards entail an annual fee, request the bank to make them lifetime-free (LTF).

Getting a personal loan with a lower credit score is possible

While a good credit score is an important criterion for approving personal loan applications, it is not the only criterion. If the other criteria, like age, income, lower DTI, etc., are firmly in favour, the bank may consider approving your personal loan application even if the credit score is lower. Hence, getting a personal loan with a lower credit score is possible, provided the other eligibility criteria are firmly in favour, and you are able to convince the bank about the loan repayment.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.