Personal Loans for Bad Credit: How to Leverage Non-Traditional Lenders?

A financial emergency can strike at any time. Whether you need funds for an urgent home repair, a sudden medical bill, or a last-minute wedding expense, a Personal Loan can be a lifesaver. However, most lending institutions will only accept your loan application if your credit score is low. To handle such situations, Personal Loans for bad credit come to the rescue. Here is how to leverage non-traditional lenders for Personal Loans.

What is a Bad Credit Score?

A credit score is a 3-digit number between 300 and 900. Lending companies expect a higher credit score, as it demonstrates your responsible credit behaviour in the past. As a result, you stand a better chance to get qualifying for a loan. Credit bureaus calculate your credit score based on your credit history. Different parameters to compute your score include outstanding debts, debt-to-income ratio, credit mix, etc. Here is an overview of the credit score ranges and their implications:

You can see a credit score below 500 is poor. It makes it difficult to obtain a loan. A bad credit score implies missed payments and outstanding balances in your existing credit accounts. Loan companies perceive you as risky. As a result, most of them will reject your loan application. If you plan to borrow a 50000 loan or higher with a bad credit score, follow these tips to boost it instantly:

• Pay off your outstanding dues on loans and credit card bills.
• Identify errors in your credit report and rectify them.
• Request an increase in your credit limit to reduce your Credit Utilisation Ratio (CUR).

What is a Loan on Bad Credit?

For those with a credit score below 500, loan approval can be challenging. However, there's a ray of hope. Some lending institutions are willing to approve your loan based on your income and repayment capacity, rather than your credit history. These are the providers of loans for bad credit. This shift in focus empowers you, as it means you have a chance to secure the funds you need, even if the loan amounts are lower and the interest rates are higher due to the perceived risk for the companies. The key point here is that it is possible to secure the funds you need.

Ways to Get Personal Loans for Bad Credit

If you seek a loan on bad credit, here are a few ways to improve your eligibility:

•  Identify and Rectify Errors in Your Credit Report

Your credit report might contain mistakes. It usually happens when your credit provider does not report or the credit bureau needs to update your latest information. Such mistakes may reduce your credit score without any fault on your side. That is why regularly checking your credit report is essential. Identify any errors as and when they happen. Report them to the credit bureau to request an immediate correction. Doing that will immediately boost your score and improve your loan eligibility.

• Prove Enough Income for Consistent EMI Payments

If your salary has increased or you have got an extra income source recently, your capacity to repay the EMIs must have improved. Show such sources to your lender when applying for a new loan. They may consider approving your application even with a bad credit score. Communicate your income stability with the loan company. They will grant your loan application despite a bad credit score if you have enough income with fewer financial obligations. However, be ready to pay a higher interest rate.

• Borrow a Smaller Loan Amount

Demanding a big loan with a bad credit score poses a high risk to the loan provider. From a lender’s perspective, it indicates a high risk of loan default. However, if you apply for a smaller amount, such as a Rs. 50000 loan, the loan company may feel more comfortable approving your loan. A smaller loan will be easier for you to repay, decreasing the chance of default.

• Add a Co-Applicant or Guarantor

If your credit score is low, consider adding a co-applicant or guarantor to boost your approval chances. The key is to choose a co-applicant or guarantor with a decent credit score. When the loan provider finds a co-borrower with a better credit score, they feel safer to grant your loan application.

•  Request the Loan Company to Consider Your Case with an NA or NH

The NA or NH clause in your credit report indicates a lack of credit activity in the recent past. The credit bureau has no record of your past credit behaviour. You may talk to the loan company about your reason for inactivity. The loan companies may offer you Personal Loans for bad credit but at a higher interest rate.

• Explore the Option of Secured Loans

Since Personal Loans are unsecured, loan companies perceive them as highly risky. However, if you borrow a secured loan, the lenders have the security of collateral. They may sell your valuable asset to recoup their money if you default. The interest rates for secured loans are also lower than unsecured Personal Loans. If you do not qualify for an unsecured Personal Loan with bad credit, explore a secured loan option. However, ensure repaying the loan on time to keep your assets safe.

Tips to Improve Your Credit Score

If you don't need funds urgently and have some time to build your credit score, follow these tips to achieve a better rating:

1. Make it a habit to pay your loan EMIs and credit card bills on time.
2.  Retain your old accounts to utilise their age and credit limit.
3.  Do not use more than 50% of your credit limit to control the CUR.
4.  Pay off outstanding balances to reduce your DTI ratio.
5.  Diversify your credit portfolio with different types of secured and unsecured loans.
6.  Borrow credit sparingly.
7.  Limit hard enquiries for new loan applications.

A bad credit score should not stop you from getting money when needed. Opt for a secured loan, follow tips to improve the credit score, or use the ways mentioned above to obtain Personal Loans for bad credit. However, their interest rates may be higher than normal.