Do you know that over 15% of the Indian population has a bad credit score? According to a credit information company's report, approximately 480 million Indian adults under 65, which constitutes around half of the earning population, are credit unserved.

A low credit score can limit your financial opportunities, especially when it comes to borrowing money. Banks and financial institutions typically use credit scores as a primary tool to determine the creditworthiness of an individual or business. A low credit score indicates a higher risk of defaulting on a loan, making it difficult to obtain financing. However, all hope is not lost.

Bad Credit in India: Understanding the Landscape

In India, agencies like Experian, CIBIL and Equifax asses an individual’s creditworthiness using credit scores. Typically, a credit score ranges anywhere between 300 to 900 and a score above 700 is considered good and below 650 is considered bad. Late payments, defaults in loans, high credit utilisation and multiple rejections in credit applications can result in a bad cibil score. Some of the challenges of a bad credit score are:

1: When it comes to loan approvals, lenders see a low cibil score as a red flag, which will eventually lead to a rejection of the loan application.

2: Despite of low score, if loans are approved, they come with a higher rate of interest For those with low cibil scores, banks may deny offering credit cards.

3: There are strategies and options available for individuals in India with bad credit to help them get the loan they need.

1. Correct credit report errors, if any:

Often, the credit bureau makes errors and mistakes on the credit report. Credit report mistakes can lead to a poor credit score, affecting credit possibilities. You should check your free credit report regularly to see if there are any errors or mistakes to report and dispute any errors or inaccuracies that may negatively affect your credit score.

2. Improve your credit score:

The first step to getting a loan with bad credit is to work on improving your credit score. You can do this by paying off any outstanding debts, making timely payments on your bills and credit cards, and avoiding applying for multiple loans or credit cards. You can also check your credit score for free on ZET. If you have a bad credit score you can try a secured credit card. This can help you improve your credit score quickly fast.

3. Look for alternative lenders:

Traditional banks and financial institutions may be reluctant to lend to individuals with bad credit. However, there are alternative lenders who may be more willing to work with you. These options include peer-to-peer lending platforms, online lenders, and credit unions. While the interest rates may be higher, these options can be a viable solution if you need a loan quickly.

4. Consider secured loans:

Secured loans require collateral, such as a car, gold, or property, in order to secure the loan. Since the lender has collateral to fall back on if you default, they may be more willing to lend to someone with bad credit. However, it's important to remember that if you do default, you may lose your collateral.

5. Find a co-signer:

If you have a friend or family member with a good credit score, they may be willing to co-sign a loan with you. This means that they will be responsible for paying the loan if you cannot. If an individual has a low credit score, having a co-applicant with a high credit score can improve their chances of getting approved for a loan. However, it's important to remember that if you default, it will negatively affect their credit score as well.

6. Apply for a loan with a guarantor:

Some lenders may allow you to apply for a loan with a guarantor. A guarantor is someone who agrees to pay the loan if you cannot. Finding a guarantor for loans can be a good solution if you don't have collateral or a co-signer.

7. Look for government schemes:

In India, there are several government loan schemes that are designed to help individuals with low income or bad credit. These include the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

8. Peer-to-peer loan:

Peer-to-peer lending is a different way to borrow money without involving banks or traditional lenders. Instead, you borrow directly from individuals or groups of individuals who are willing to lend you money, usually through an online platform. ZET app is a convenient collective platform that allows individuals to obtain loans from various popular peer-to-peer platforms, without the need for a good credit score or collateral.

It may be possible to get lower interest rates with compared to traditional loans, although this will depend on how low your credit score is. It is possible that individuals with extremely low credit scores may not meet the eligibility criteria for this kind of loan.

9. Ask for a lower personal loan amount:

While having a poor credit score can make it difficult to get approved for a loan, it is still possible to obtain it even with bad credit by requesting a lower loan amount. This approach can help to minimize the risk of default for the lender, as they are lending out a smaller sum of money.

Getting a loan with bad credit in India can be challenging, but it is not impossible. Explore these strategies & alternative options that can help in getting the finance you need with a bad credit score. However, the best and recommended way is to improve your credit score over time and then apply for credit.

Loan Options for Individuals with Bad Credit

There are certain loan products available for individuals struggling with a low credit score:

Secured Loans - Lenders offer loans with collateral, like gold loans, loan against Fixed Deposits, and loan against property for individuals with a low credit score.

NBFCs and FinTechs - While traditional banks deny personal loans, NBFCs and FinTechs will be more than willing to offer loans to individuals with a low cibil score, with a higher interest.

Employer salary advance - Some companies give salary advances to employees with a low interest rate and will deduct the same on a monthly basis from the salary.

Government schemes - For small business owners with a low cibil score, initiatives like the Pradhan Mantri Mudra Yonjana PMMY) help meet their requirements.

Strategies to Improve Loan Approval Chances

Despite of having a low cibil score, individuals can still take steps to increase their chances of getting loans:

1: Banks might approve smaller loans for individuals with low cibil scores.

2: Providing a collateral against the loan can reduce lender risks, leading to higher chances of approval.

3: A co-applicant with a good cibil score and strong credit history can improve the odds.

4: Providing proof of income such as salary slips, business returns, IT returns will assure lenders of the individual’s repayment capacity

Rebuilding Your Credit Score: Long-Term Solutions

Pay bills on time - Late payments will impact credit scores. So setting up auto-debit options for payments will ensure that bills are paid on time.

Reduce your Credit Utilisation ratio - Credit card usage below 30% of the available maximum limit will positively influence credit scores.

Secured Credit Cards - Credit cards against fixed deposits display responsible credit usage.

Avoid Multiple Credit Applications - Each enquiry on a loan or credit card application can temporarily reduce credit scores.

Check Credit Reports - Checking credit reports regularly can help correct inaccuracies which can drag scores down.

Clear Debts - clearing pending debts and prioritising repayments can boost credit scores over time.

Frequently Asked Questions:

1. What is a bad credit score in India?

A bad credit score in India is generally considered to be a score below 600. However, this can vary depending on the credit bureau and the lenders’ policies.

2. What does "credit unserved" mean?

Credit unserved refers to individuals or businesses that do not have access to formal credit facilities or have limited access to such facilities due to factors such as a lack of credit history, low income, or a poor credit score.