Interest rates and credit scores go hand in hand. The higher the credit score, the higher the chance of you landing a personal loan with low interest rate and vice versa. The situation becomes particularly difficult if you have a low credit score as it invariably leads to loan rejections. Even if the loan is not rejected, the lenders usually charge a higher interest rate on the loan amount. Fintechs like Qbera do operate in this niche area and approve instant personal loans to individuals with low credit score by basing their lending decision on social and economic criteria.
Typically, banks and lending institutions prefer a score of 750 and above while giving out unsecured cash loans. Fintechs do consider marginally low credit scores, however, they do have internal norms dictating their lending decisions.
What are credit scores?
Credit scores are points assigned to individuals by the Credit Information Bureau (India) Limited (CIBIL) or any such regulation companies. These points are given based on the past credit behavior of an individual. The number of loans availed, the type of loan whether secured or unsecured, defaults in payment (if any) and loan inquiries made are considered and analyzed to determine the creditworthiness of an individual. The presence of repayment defaults and excessive pulling of credit score by creditors can cause the overall score to go down.
What is the effect of a high interest rate?
The fact that personal loans are unsecured brings a high interest rate into the equation. If a poor credit score is added into this mix, it will result in an extremely high interest rate being charged for a personal loan. High interest rate results in a higher EMI charged to be paid out each month. It also drastically increases the amount paid out at the end of the loan term.
Ways to manage and promote one’s credit score
- One of the ways to advocate yourself while having low credit scores is to prove to the institution that your income can support regular EMI payments. You can present your salary slips and bank statements. Your stability in the job too can be a major deciding factor. Hence, if you do have documentation that is convincing, go ahead with it.
- Applying for an unsecured personal loan along with a co-applicant or a guarantor is another way of ensuring that the loan is approved. Your spouse can be a co–applicant if he/she has good credit scores.
- It is a possibility that your previous loan closure reports haven’t been communicated with the bureau. In that case, regularly screen and track your credit report and take corrective measures, if needed.
Overall, it is best if you have a good credit score. A marginally low score is also okay and can get you a personal loan. However, if you have poor credit scores, it is advisable to take corrective measures and work towards improving your score. Something as simple as avoiding a lot of ‘hard pulls’ on your account or opting for a low balance credit card is helpful. Nevertheless, it is exceedingly difficult is get a low-interest personal loan while having a poor credit score.