Although you can secure loans for bad credit scores, you will likely encounter challenges such as not getting the desired loan amount and facing high interest rates. You must strategically improve your score before applying for a loan to avoid such a situation.
What is a bad credit score, and what causes it?
If you have borrowed loans or used credit cards, your CIBIL report will reflect your credit score, a number between the range of 300-900. It is a direct indicator of your creditworthiness. Generally, lending institutions prefer a credit score of 750 and above, so it is a good idea to constantly work towards keeping it high. A bad or low credit score is anything below 550 and can seriously affect your ability to secure a favourable loan. Take a quick look at credit score categories and what they mean when you are trying to get a loan:
- Bad credit score: 300-550 (higher possibility of loan rejection)
- Average credit score: 550-650 (better access to loan options but may likely face challenges)
- Good credit score: 650-750 (improved chances of securing a loan with favourable conditions)
- Excellent credit score: 750-900 (usually easy to get a loan at preferential terms)
Various factors can cause a low credit score, including late payments of EMIs and bills, high credit utilization, multiple credit accounts, and credit report discrepancies.
Are there loans for bad credit scores?
Yes, you can get a loan even with a bad credit score, but the options might be limited, and interest rates may be higher. Traditional banks prioritize low-risk borrowers with strong credit histories, whereas Non-Banking Financial Companies (NBFCs) tend to have more flexible eligibility criteria. Instead of outright rejecting individuals with low credit scores, they review every loan application individually and then take a call. They often offer loans on bad credit scores but with stricter loan terms such as lower amounts, high interest rates, and shorter loan duration.
How to get a loan with a low credit score?
Ideally, individuals with significantly low credit scores must improve it before applying for a loan. However, it is not an overnight process; you need anywhere between a few months and a year to see positive results. Sometimes, in situations such as a medical emergency or unexpected travel, you need instant funds, and it becomes impossible to improve your credit score before a loan application. In that case, the following strategies can help you get a loan with a bad credit score:
- Research lending institutions offering quick loans for bad credit scores.
- Opt for a secured loan to improve your chances of approval.
- Apply with a co-signer or co-applicant who has a high credit score.
- Show proof of stable income, including salary slips, bank statements, and other relevant documentation.
- Choose a lower loan amount.
How can you improve and maintain your credit score for better loan approval?
Are you anticipating borrowing a loan soon? You must first check your credit score to understand your financial health. If it is below 750, take it as a sign to implement specific strategies to improve your score. The efforts will pay off at the time of loan application in terms of lower interest rates and quicker approvals of desired loan amounts. Look at what you can do today to reverse your bad credit score.
1. Start paying EMIs and bills on time:
Your payment history has the maximum impact on your credit score, at nearly 35%. Hence, you must ensure you never miss or delay any payments. You can set up calendar reminders or autopay for recurring EMIs, credit card bills, and utility bills.
2. Pay off existing debts:
Analyse your income, track your spending to understand where you can cut down your expenses, and prioritize maximum funds for debt repayments. When you receive gift money or bonuses, allocate the extra cash to prepay loans.
3. Skip new credit applications:
When you apply for new credit cards or loans, lenders issue a hard inquiry to check your creditworthiness, which can lower your credit score. So, pause new credit inquiries unless absolutely necessary when attempting to boost your credit score.
4. Maintain a low credit utilization ratio:
Use around 30% or less of your available credit every month to maintain a good credit score. In other words, if your credit limit is 50,000 per month, you should not use more than 15,000.
Apart from the above active, long-term efforts, here are some bonus tips for maintaining a healthy credit history and preventing applying for loans on bad credit score:
- Check your credit report for any errors and fix them immediately
- Avoid closing old credit accounts
- Increase your current credit card limit
- Maintain a diverse mix of secured and unsecured credit
- Regular review of your Credit Card Activity
Bottom line
A bad credit score is not permanent—you can improve your financial habits and quickly reverse it within a year. By doing so, you’re signing yourself up for desired loan approvals. That said, if you’re in an emergency and don’t have time to build responsible credit behavior, do not panic. Instead, approach reputable NBFCs such as Manba Finance to provide loans for bad credit scores.
