A credit score is a numerical figure that symbolises the creditworthiness of a person and is generated on the basis of the credit data of an individual, that is available on the records. CIBIL score is a term that is synonymously used for credit score. It is issued by CIBIL which is an abbreviated form of Credit Information Bureau (India) Limited. The company has been renamed as TransUnion CIBIL. It is the oldest credit bureau in India and is, therefore, the most popular. Alongside TransUnion CIBIL, Experian and Equifax are the other credit bureaus in India which issue credit scores. Banks collect credit reports from all credit bureaus in order to define the creditworthiness of their customers.
Credit score plays a crucial role in the approval of your loan application for a personal loan. A high CIBIL score not only improves the chances of loan approval but also accelerates the process. Therefore, it becomes necessary for borrowers to maintain a good CIBIL score so as to enjoy the benefit of taking loans. However, under certain circumstances a lender even lends money to those with a low CIBIL score.
What is a CIBIL Score?
A CIBIL score is a three digit number generated by the credit bureau TransUnion CIBIL. The credit bureau records the credit history of an individual and generates a credit report. Based upon this report, it assigns a number to an individual. This number is referred to as the CIBIL score of the individual. It ranges between 300-900 and indicates a person’s creditworthiness where 900 is the best credit score and a score of 300 is the worst.
A CIBIL score of 750 is considered to be good and individuals with a credit score equal or higher than this number are given preference for lending. However, banks may also lend to individuals with a CIBIL score as low as 600. A credit score below 600 is considered as bad and lenders often refrain themselves from giving away funds to these individuals.
CIBIL Score and Personal Loans
Since personal loans are unsecured type of loans, CIBIL score acts as an important determinant of whether a lender will lend to a particular borrower or not. A high CIBIL score indicates a good credit behaviour in the past. This indicates that a borrower will continue the good behaviour in the future and will repay the loan on time. A bank will easily lend to such borrowers. Also, they will enjoy lower interest rates and better loan terms.
A low credit score reflects poor borrowing history. A lender will often resist from lending to customers with low CIBIL scores. Even if the loan gets approved, the interest rate offered to these customers will be extremely high. The general unwillingness of lenders and strict terms of lending limits credit options for customers with low credit scores. The banks however offer a relief option for these customers referred to as bad credit loans.
Bad Credit Loans
A bad credit loan is a personal loan only with just one difference that it is for people with a bad credit report. The interest rates associated with bad credit loans are phenomenally high and the loan terms are usually stringent. The application process and repayment methods for bad credit loans are same as that of a personal loan. The approval process is generally short, with loans getting approved within a couple of hours, since most of the lenders offer online application and approval. However, since banks offer a high interest rate over bad credit loans you can look for other options for availing these loans such as:
Credit unions are a great option for those looking to save amount payable as interest on a personal loan. The maximum interest that a credit union can charge is capped at a rate of 18%.
Adding a Co-Signer
A co-signer is a guarantor with normally a decent credit score who signs your loan application as a guarantee that in case you fail to repay your loan, he will pay the pending amount. If your co-signer has an incredibly good credit history, a lender may offer lower interest rates.
Home Equity Loans
A home equity loan is taken by keeping equity of home as collateral with the lender. Here, credit score is not a determining factor for the approval of loan. The loan amount depends upon the value of the property. Since it is a secured loan, the interest rates are naturally lower compared to a personal loan.
Peer to Peer Lending
There are numerous online blockchain, machine learning and artificial intelligence based platforms that provide a lender-borrower interface. The lenders over these platforms offer comparatively lower interest rates and are generally flexible with loan terms.
Family or Friends
Who is easier to convince about your creditworthiness than your own family and friends. Not only will they easily lend you the money but will also charge lower interest rates and in some cases may not charge interest at all.
Advantages of a Bad Credit Loan
Along with the ability to avail credit with a low CIBIL Score a bad credit personal loan offers many other benefits as well. These are:
Since most lenders have an online presence, applications can be filed online. The AI algorithms only take a few minutes to process the application and verify the attached documents. Thus, it only takes a couple of hours to get a response from the lender. Certain lenders will even transfer the funds in your account on the same day only, such as Indiabulls or Home Credit.
Lower Interest Rate Compare to Credit Card
The interest rates attached with bad credit personal loans are comparatively lower than that of a credit card debt. It makes them a better and more affordable option.
Due to increase in the number of peer-to-peer lending platforms, there is a rising competition between various lenders. This competition leads to lowering down of interest rates. You can compare interest offers from various lenders and then decide what suits the best to your pocket.
Loan Tenure Elongation
Bad credit loans often come with the flexibility of increasing loan tenure by a duration that may range between twelve months to five years.
Improves Credit Score
Making sure that EMIs are paid on time can improve your credit score and therefore help you fetch better loan terms next time.
Disadvantages of a Bad Credit Loan
As everything comes with a price, availing a personal loan with a bad credit reputation also has certain adversities attached to it. These include:
High Rates of Interest
Since bad credit loans involve a huge risk at the lender’s side, they will naturally offer high interest rates in order to compensate for the risk.
Fees and Penalties
There is a high processing fee, loan origination fee and late payment fee attached to a bad credit loan. Also, if you make repayments by cheque, you will have to pay an additional amount as cheque processing fee.
Collateral Requirement in Some Cases
Due to the high risk involved for themselves, the lenders may ask you to keep an asset such as a house, car or any other valuable as mortgage in order to cover the risk.
A bad credit loan can be availed by salaried, self-employed and even a non-salaried person. The following conditions are to be met in order to avail a bad credit personal loan.
Resident of India
For availing a bad credit loan in India, it is important that the applicant must be a resident of India. Therefore, NRIs cannot enjoy such loans.
An applicant must be at least 18 years old for availing a personal loan with a bad credit score.
The annual income of a person should not be Rs. 3 Lacs so as to enjoy the benefits of a bad credit loan. This ensures a lender that a person is capable of repaying the loan.
A bad credit loan can fulfil the financial needs of adult residents with a low CIBIL score. An online application process and quick approval make it even more attractive. However, the high interest rates and the stringent norms attached to it can make it a dangerous option. One must evaluate his capacities before entering the treacherous waters of a bad credit loan.