“Will financial institutions approve my personal loan application if I have a poor credit score?” – We often get calls on our helpline from loan seekers, all wanting an answer to this question. In most cases, they all have the same story. An urgent need for money, have never checked their credit score before applying, and are experiencing anxiety when they have decided to apply for a loan. So here we are going to discuss what are the implications of your credit score and how to improve it.
Can I get approval on my application despite a poor credit score?
Well, the answer is yes. Financial institutions do provide personal loans to individuals despite a poor credit history. But it’s almost always provided at high interest rates. Financial institutions such as banks and NBFCs consider it risky to lend money to loan seekers with poor credit history as they fear the seekers won’t be able to pay it back. Hence, they charge a higher interest rate. What’s more, some institutions might approve the loan application but not disburse the full amount, compelling such borrowers to apply for loans from multiple sources.
Although these measures work in the short-run, loan seekers with poor credit scores need to build a better credit history to improve their chances of getting a loan in future. This will not only help their chances of getting a loan, but also loans at affordable interest rates and attractive terms.
How do I improve my credit score?
Here are four simple steps that individuals with poor credit score can take to improve their credit score:
1. Diagnose problems in your credit history: Check your free Credit Report to determine the root causes of your bad credit history. For instance is it because you lack sufficient income or because you forgot to pay EMIs on time? You can use IndiaLends free Credit Score service to check your credit accounts. This way you can diagnose problems in your credit history.
2. Make a financial plan to deal with the problems: Create a financial budget to manage your income sources, savings, expenditure needs, and debt better. This will help you prioritize resources wisely and allocate resources to payback your debt without hampering your fixed expenses or lifestyle adversely.
3. Prioritize repaying your existing loans: Find out which loans charge high interest rates and pay them off first. With this approach, the debts get paid more quickly and you end up paying less in terms of overall interest. Also, this repayment strategy also improves your credit score.
4. Repay loans on time: Ensure your pay your credit cards bills and loan EMIs on or before the due date. A simple way of doing this is by setting up reminders in your phone to pay the EMI on time.
Bonus Step: Take-up a new loan against security or with a guarantor/co-applicant who has a good credit score. Secured loans against assets or with guarantor provide collateral to the financial institution and allow you to get credit at a lower interest rate. Since they have lower interest payments, they are easier to pay back and improve your credit score quickly.
The above steps will help you build a strong credit history with some existing credit products.
