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Can you get a loan with a low credit score? Here’s what you should not miss
08 November, 2024 | 11:01 IST

Most of the banks and non-banking financial companies (NBFCs) are offering personal loans these days without any collateral or mortgages. The lenders approve the loan applications based on two key factors— the credit score and income level of the borrowers. So, it’s extremely important to have a high credit score and a healthy credit history if you are looking for a quick approval for a new personal loan. The same rule also applies for other credit instruments like a credit card or a pre-approved credit line.

Understanding how your credit score impacts your loan application could be helpful in securing the funds you need. The chances of quick approval for a personal loan are higher with a good credit score. However, you can still get a loan with a low credit score range.

For the borrowers with low credit score, personal loan approvals may come with higher interest rates compared to others.

Despite a low credit score, you can still get approval for a personal loan by taking a few measures as lenders often take into account other elements while approving a loan.

Table of Contents

Understanding your credit score
How to get a personal loan with a low credit score
Factors that affect your credit Score
Summary

Understanding your credit score

Before diving into strategies for securing a loan with a low credit score, it’s essential to grasp what a credit score is and how it impacts your loan application.

A credit score is a three-digit number that summarises your credit history, helping lenders assess your creditworthiness. The credit score range usually lies between 300 and 900. A score of 750 or above is considered good, while anything below 600 is viewed as poor.

Lenders use your credit score to evaluate the risk of lending, wherein a low score often signals that you could be a risky borrower. If your credit score is low, many lenders may hesitate to approve your loan application, and if they do, you can expect higher interest rates and tougher terms and conditions.

Therefore, it’s important to improve your credit score before applying for a personal loan.

How to get a personal loan with a low credit score

Even if your credit score is low, there are a few ways you can employ to improve your chances of securing a personal loan.

Opt for a lower loan amount: When applying for a personal loan, consider opting for a lower loan amount. Requesting a high amount can make you appear riskier to lenders, especially with a poor credit score. By applying for a smaller loan, you can improve your chances of approval and manage repayments without default.
Prove your income stability: Demonstrating financial stability can improve your chances of obtaining a loan, even with a low credit score. If you have recently received a salary hike or have an additional source of income, share this information with lenders. Providing proof of a stable job and income can show your repayment capacity to the lender.
Consider having a co-applicant: Another strategy is to apply for a loan with a co-applicant or guarantor. By including someone with a healthy credit score on your application — such as a spouse or a close relative — you can leverage their creditworthiness to boost your chances of approval. This arrangement not only increases your likelihood of securing a loan but can also lead to more favourable interest rates.
Offer collateral: While personal loans are usually unsecured, some lenders may allow you to pledge collateral against your loan. Offering security can make lenders more inclined to approve your application, even if your credit score is low.

Factors that affect your credit Score

Your credit score is determined by several factors such as follows:

Payment history: Lenders look at how consistently you make payments on time. A strong track record of timely payments can significantly improve your score, while missed or late payments can have a detrimental effect.
Amount owed: The total amount you owe across loans and credit cards also plays a significant role in shaping your credit score. High balances, especially if they approach or exceed your credit limits, can lower your score. Conversely, managing smaller balances and ensuring timely repayments can boost your creditworthiness.
Length of credit history: The duration of your credit history is another important factor. A longer history of responsible credit use can positively influence your score.
Variety of credit products: Having a diverse range of credit products — such as personal loans, mortgages and credit cards — can also contribute to a healthier credit score. This variety shows lenders that you can manage different types of credit effectively.
Recent credit activity: Your recent credit activity can impact your score. This includes new account applications, credit inquiries and your usage of credit limits.

ALSO READ: Personal loan impact on credit score

For those looking to navigate the complexities of obtaining a loan, digital platforms like Moneycontrol offer access to multiple loan offers. Through Moneycontrol you can check multiple personal loan offers from select lenders and apply for loans through a 100% paperless process. You can apply for a personal loan up to ₹15 lakh through the Moneycontrol app and website, at interest rates starting at just 12% per annum.

To get started, just follow these three easy steps — enter your details, complete your KYC and set up your EMI repayment.

In conclusion, obtaining a personal loan with a low credit score may seem daunting, but it is not impossible. By employing strategies such as opting for a lower loan amount, demonstrating stable income, considering a co-applicant and possibly pledging collateral, you can raise your chances of approval.

Summary

A good credit score increases your chances for personal loan approval but even with a low score, there are ways to improve your chances. This article covers tips to securing a personal loan even with a low credit score.

Disclaimer

This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.

About the Author

Fintech

Stay updated on the latest personal finance trends, with a focus on products like credit cards, credit score, personal loans, fixed deposits, and more

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