You are aware that it is difficult to get a loan if you have a poor credit score.
Your credit score is a measure of your repayment ability. A poor credit score implies poor repayment ability/intent. Therefore, banks/NBFCs may not be as keen to lend to borrowers with a low credit score.
You have a poor credit score but need a loan. What will you do?
Fortunately, there are still a few options that you can explore.
However, while you explore such options, there is one thing that you need to be mindful of.
When you borrow, the lender (bank) must ensure that it will get its money back or gets adequately rewarded for the risk taken.
Therefore, a borrower with a poor credit score will have to do either of the following to provide comfort to the lender.
- By offering security to the lender. If you don’t repay, the lender can sell the security and square off the loan. OR
- By paying a high rate of interest to compensate the lender for the risk taken
In this post, I will look at many such options that a borrower (with a poor credit score) can explore.
Do note it is not that only borrowers with a low credit score can take such loans. Even borrowers with a good credit score can try these options. However, with a good credit score, you may be able to find better loan options.
#1 Gold Loans
If you have gold ornaments, you can offer those as collateral and get a loan. You can get the loan for up to 75% of the value of the gold offered as collateral.
Please understand you get the loan only for the value of gold (and not the ornament). Essentially, you do not get anything for the making charges or the studded stones or diamonds.
The disbursal of such loans is also quite swift. Some banks or gold loan companies claim to provide you loan within a few minutes.
The tenure of gold loans is typically up to 12 months but can go up to 36 months in some cases.
Your CIBIL or credit score does not matter. If you do not repay the loan on time, the bank can recover funds by selling off your gold.
#2 Loans from your insurance policy
You can also borrow against your life insurance policy.
Do note such loan facility is available only under traditional life insurance plans. Loan facility is not available for Unit-linked insurance plans (ULIPs) or term life insurance plans.
The loan amount is typically capped at 90% of the Surrender value of the policy.
If you do not pay the loan on time, the bank/insurance company can utilize the proceeds from the insurance policy to square off the loan.
You can read more about loans against LIC policy here. Even though the terms and conditions may vary across insurers and banks, you are likely to have a similar structure.
#3 Property Loans
If you have a residential property, you can take a loan against that property too. A few banks may be willing to lend against other kinds of properties too. However, it is easier to get a loan against a residential property.
Since the loan is secured, the banks may be willing to ignore your low CIBIL score. However, the banks will still look at your repayment ability (income statement etc).
The LTV for the property will vary across banks and may range between to 50% to 70% of the value of the property.
Since such a loan would involve a fair amount of documentation, you can expect the process to be fairly drawn out and to take some time.
#4 Loan against your PPF account
You can borrow against your PPF account too.
Such PPF loan facility is available only for a limited period. You can take a loan against your PPF account from the beginning of the 3rd year till the end of the 6th year.
3rd year means one year from the end of the financial year in which the PPF account was opened.
6th year means five years from the end of the financial year in which the PPF account was opened.
Therefore, the loan window is only for 4 years.
After the end of the 6th year (with the beginning of the 7th year), you can withdraw from your PPF account. Therefore, the need for the loan facility automatically dies down.
The maximum loan amount is 25% of the PPF balance at the end of the second year immediately preceding the year in which the loan is applied.
The maximum investment in PPF is capped at Rs 1.5 lacs per financial year. Moreover, the loan amount is capped at only 25%. Therefore, don’t bet on a big loan amount against for PPF balance.
The rate of interest is 2% above the PPF interest rate.
#5 Loans against Shares and mutual funds
If you have equity shares, bonds or mutual funds units, you can borrow against those investments too.
In fact, a few banks claim to provide you loans against such securities within a few minutes.
As per RBI guidelines, the Loan to Value (LTV) for equity investments (shares or mutual funds) is capped at 50% of the value of the investment. There is no cap specified for debt investments. Respective banks/credit institutions can have lower caps as per their internal credit guidelines.
Since you are providing a liquid security, banks may not insist on a good credit score.
Frankly, in my opinion, you are better off selling your investments (in most cases) instead of taking a loan against those investments. Loan interest rate will certainly be higher than the return on any of your debt investments. For equity investments, the return is anyways not guaranteed (but the rate on loan is).
#6 Peer-to-Peer Lending Platforms (P2P lending platforms)
This can be your last resort (before going to local moneylenders).
In this case, the lender is a regular person like you and me.
The maximum amount of loan that you can take from across the P2P lending system is Rs 10 lacs.
P2P loans are unsecured loans. As per RBI guidelines, such loans can’t be secured.
However, the rate of interest can be extremely high (since there is no security). Don’t be surprised if the all-in-cost of the loan is in excess of 20-30%.
To find out more about Peer-to-Peer lending and such platforms, you can refer to this post.
Your credit score may still affect your borrowing rate. However, you will still find lenders who may be willing to lend to you at a high rate of interest.
In this post, we looked at many loan options for low credit score borrowers. However, that does not mean that you should not work on your credit score. Firstly, you must check your credit score on a regular basis. Now, you don’t even have to pay anything to access your credit score.
You can download 1 free credit report (per credit bureau) per calendar year. If you find anomalies in your credit report that are dragging your credit score down, take action (raise dispute) to rectify such issues. Alternatively, if your credit score is down due to your poor credit behaviour, take steps to improve your credit score.