How to Get an Approved Loans With Defective Credit Score?
With the rapid changes in the global economy and the increasing demand, resources have been exhausted to meet demand.
Here, we are talking about the need for financial resources called money. Individual and company houses need funds to meet their personal and professional needs.
I am a full-time employee and have a fixed monthly income, but I still feel that in addition to my monthly income, an additional amount is required. If you feel the same, then the lending institutions are the good options to apply for the loans.
Nowadays, there are many organizations that offer secured and unsecured loans to the general public. Maintaining a healthy credit score is very convenient and easy to get a loan.
But the problem arises when the credit score is poor and credit scoring does not meet the lending institutions’ requirement.
There are Two Types of Finance:
Individual Need Finances
Corporate Need Finances
To pay medical expenses
To start a new business
To pay for children's education
To meet the working capital requirements
To buy a new vehicle
To pay off their debts
To go for vacations
To diversify products horizontally or vertically
To buy or build new houses
To expand your business through mergers and acquisition strategies
What is Your Credit Score?
The parameters of the credit check report range from 300 to 900, which meets the eligibility criteria for approving any loan application.
There are a variety of evaluation tools that enable credit managers to evaluate the creditworthiness of customers. It is important to consider while sanctioning loans such as home loans, personal loans or business loans.
Banking and financial institutions will offer loans at best interest rates if the credit score is above 800. In this category, the interest rate could be as low as 8.5% per annum. Hence, a good credit score enables you to get the loan at its lowest interest rate.
Between 750 to 799
If your score falls under this category, you will be able to avail 0.25% to 1% deduction in normal interest rates. Mostly, 80% of the banks or financial institutions lend money easily if you maintain 750 or higher credit scores.
Between 700 to 750
In this category, there is more burden of interest rates toward loan financing. Under this category, banks offer loans with 0.5% to 2% higher interest rates.
Less Than 700
When your credit score is below 700, there are a few chances or no chances of availing a loan from any organization.
There are some of the best possible ways to avail a loan even though you have a low credit score. Let's discuss each possible way in detail.
1. Add a Guarantor
Under this alternative method, you can borrow funds from the banks adding a guarantor for the debt security. A guarantor can be your parents, relatives and any of your family members. They will also be equally liable for the amount borrowed by the principal debtor. In the case of default, the guarantor is asked to make a payment of loans taken by the principal debtor. This procedure is very useful for getting education loans or personal loans.
2. Medium Enterprise Loans
As cooperative banks and rural banks ignore the credit scoring system, you can approach those banks for the loans. Many small housing finance companies, non-banking financial corporations, and microfinance institutions will also be helpful for getting a smaller amount of personal loans or home loans.
But before reaching to alternative lending institutions, it is important to know that the interest rate on their loan is slightly higher compared to other organisations.
3. Loan Against Securities
When any eligible securities are pledged as collateral to cover the guarantee on a loan provided, then it is called loan against securities.
When your credit score is low, and you lose the hope of getting loans from everywhere, loan against securities is the only way you can avail loans. This does not involve the investigations of any type of credit report.
Following are eligible securities:-
Fixed deposit, Life insurance policy, Endowment policy
Gold loan, Provident Fund account
Mutual fund's units or shares, Credit cards
Overdraft facilities on salary account, current, or savings account
Under this facility, interest can be a little higher than home loans, but it will be much cheaper than personal loans. This loan, if repaid properly, can help in improving the credit score of the borrower. Tax benefits are also available under the income tax act 1961 on such investments.
4. Friends and Family
There are various benefits when you borrow funds from friends, family or relatives. The benefits include the lesser interest rate and faster allotment of funds.
In this community, the interest will be between 8% - 10% annually. While following this process, the loan agreement should be signed by both parties with all terms.
5. Loans from Corporate
The benefit of this scheme is available for corporate sector employees. Also, human resource partner policies under which an employee gets a personal loan from the employer.
Hence, the banks approve the loans to an employee of his/her employer. Mostly, loan requirements for small amounts can be easily fulfilled in this way. Whereas, the same is not applicable to borrowing huge amounts.
6. Private Lenders
Any individual or company which lend money to the people without any banking tie-up such as Best Egg and Light Stream are termed as Private lenders. While having low credit scores, you can also borrow funds from some private lenders. Generally, lenders live in semi-urban or rural areas in the country.
They distribute loans for an amount ranging between rupees 2-4 lakhs up to a maximum tenure of 3 years. In the case of a huge amount of money, they ask for a mortgage of property or gold as a security asset. Overall, these are useful for smaller loans and short duration.
I am sharing here a real-time scenario. Here it is:
A client, named Ajay, was very worried due to the lack of capital for his business expansion. He belongs to a middle-class family. He started a dairy business two years ago with 5 cows and 3 buffaloes.
When I asked him about his loan requirement, he explained to me saying he only needs two lakhs rupees for a period of two years.
Then, I examined his business profitability status and cash flow from his business activities. I was surprised to see that his business income is 30,000/- per month.
It means he is carrying out his business activities very well. He has a strong customer base to whom he sells milk on a regular basis.
Hence, I suggested that he apply for a medium enterprise's loan in the nearest rural bank branch.
The required documents were proof of address, proof of identity, property ownership proof and a co-applicant to act as a guarantor in the case of default in payment by the principal debtor.
Ajay submitted all the documents along with the request form to the rural bank. After 3 days, he got a confirmation call for approval for his application.
He needs to visit the bank after 2 days with the co-applicant to fulfil some formalities. Once he signs all the documents, the payment of the loan is disbursed into his account.
As per the contract, Ajay will repay the borrowed amount into monthly instalments for up to 24 months. And in this way, the need for funds was resolved for Ajay.
Despite having a low credit score, there are a plethora of possible ways to get loans from different lending institutions. But these points should be kept in mind while applying for loans if you have a low credit score.
The factors like the default on any payment or not paying a credit card bill on time may lower down the credit score that will affect you while availing loans from the banks.
It is always wiser to follow the right path and never indulge in any kind of money laundering practices. Involvement in money laundering may cost penalty or imprisonment or both. Hence, either keep your credit score good or find a good lending institution that can avail you a loan despite a lower credit score.
Suspected money laundering may be subject to fines or imprisonment, or both. Hence either keep your credit score good or find a good lending institution that can avail you a loan despite a lower credit score.
How Often Do You Check Your Credit Score
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Prateek Jain