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

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

Banks typically consider a credit score of 750 and above as a good score to approve a personal loan, provided the other eligibility criteria are met. That doesn’t mean a person with a lower credit score won’t get a personal loan. In this article, we will discuss some of the ways someone with a lower credit score can get a personal loan.

Make sure you have a guarantor or a co-applicant

Since a personal loan is an unsecured loan, you cannot put up any collateral or assets to take out a loan against its security. If your credit score is lower than the minimum required by the bank, consider hiring a guarantor or co-applicant to strengthen your case. Hire a guarantor or a co-applicant who has a good credit score, a stable source of income and meets the other eligibility criteria.

Maintain a low debt-to-income ratio

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

Some banks assume a DTI ratio between 36% and 50% for approving loan applications on a case-by-case basis, provided the other eligibility criteria are clearly in favor. So if your credit score is lower, strengthen your other eligibility criteria, such as a lower DTI. Make sure your DTI is less than 30% so that it convinces the bank that your ability to repay your loan is strong.

Prove to the bank that your income can support EMI payments

If your salary has recently increased, share the proof with the bank. Do you have additional sources of income? Then share the data with the bank. The increase in income and additional sources of income can convince the bank that you can easily manage to pay the personal loan EMIs. It increases your chances of loan application approval.

If necessary, ask the bank to reduce the loan amount

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

Get a secured credit card against an existing fixed deposit

In addition to personal loans or other loans, credit card applications also require a good credit score. If you have a low credit score and want a credit card, you can opt 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 varies between 80 and 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 lower credit score. However, banks usually consider such loans risky and charge higher interest rates than others. Once you get the personal loan, you should work on improving your credit score so that you don’t have to pay higher interest on future loans or you will be rejected. Some of the suggestions include the following.

Make timely payments

The credit information companies (CICs) like CIBIL take into account various factors to calculate the credit score. Within this, timely payment of loan EMIs and monthly credit card bills has the highest weightage. So, to build and maintain a good credit score, you need to ensure timely payment of loan EMIs and monthly credit card bills. Choose direct debit or set reminders for timely payment.

A low credit utilization ratio

The credit utilization ratio measures the percentage of the credit limit that is used of 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. So her credit utilization ratio was 10%.

A credit utilization ratio of 30% or less helps increase your credit score. Therefore, always aim for a credit utilization ratio of 30% or lower. If you regularly exceed that limit, ask the bank to increase your credit limit. A higher credit limit and the same monthly spend on the credit card will lower the credit utilization ratio. If your income has increased recently, share the latest paychecks with the bank and request an increase in the credit limit.

A healthy mix of secured and unsecured loans

Always aim for a healthy credit mix of secured loans (home loans, car loans, etc.) and unsecured loans (personal loans, credit cards, etc.). A diversified credit mix contributes positively to 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 consider this as credit-hungry behavior. It will result in multiple credit inquiries, resulting in a lower credit score and rejection of credit applications. You should therefore always submit one credit application at a time and wait for the bank’s final decision before continuing with the next application.

Save old credit cards from obsolescence

The older a credit card, the higher its aging rate and the better it contributes to improving your credit score. So if you have an old credit card that you don’t use, consider keeping it open. You can make trades with it occasionally just to keep it active. If such credit cards have an annual fee, ask the bank to make them free for life (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 such as age, income, lower DTI, etc. are clearly positive, the bank may consider approving your personal loan application even if the credit score is lower. Therefore, it is possible to get a personal loan with a lower credit score, provided that the other eligibility criteria are clearly favorable and you can convince the bank to repay the loan.

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