A credit score plays a significant role in determining whether a loan will be approved or not, and at what interest rate it will be distributed. Maintaining a high credit score makes it easier to secure a loan or borrow money. A bad or low credit score may lead to higher chances of rejection from banks or lenders. But this does not mean that you cannot avail loans with a poor or bad credit score. Some lenders and borrowers are specifically designed for people with low credit scores.
Here, we will be looking deeper into the loans that are available for bad credit scores. You will also get to know how this works and about the primary things you need to know before applying for it.
Personal loans for bad credit scores
Many banks and NBFCs (Non-Banking Financial Companies) provide personal loans to those with bad credit scores. However, if they provide the loan, the interest rates may be higher, and getting approval for the loan may depend on your income stability. Apply with institutions known for flexible lending policies for bad credit score loans instead of approaching traditional banks that have strict rules.
Bad credit score loans may be used in case of emergency medical issues, education, or for any personal needs. Show the proof of a steady salary or any other income to improve the chances of fast loan approval.
How do they work?
These loans are mostly unsecured, which means you don’t have to promise any collateral. Approval of the loan highly depends on your repayment capacity rather than on checking your credit history.
Secured loans (Loans against Collateral)
Secured loans are easy to gain because you provide an asset for security for the borrowed amount. The assets can be a property, gold, or fixed deposits. In this case, the interest rate will be much lower than that of unsecured loans, making it more affordable.
Since the lender has collateral, the risk of non-payment reduces, in turn making them more willing to approve loans for bad credit. Common secured loans include gold loans, loans against property, and loans against fixed deposits. Choose collateral that you are willing to pledge, for example, if you need urgent funds, gold loans are faster to process than property loans.
Payday loans
Payday loans are short-term loans that are mostly provided until your next paycheck. These are one of the main options used by people who are looking to take loans for bad credit, mostly used by those with poor credit scores. These loan approvals are based more on income than on credit scores. They are best suited for small emergencies like utility bills or medical expenses. The interest rates are much higher, and the repayment timeline will be really short. One of the major concerns of payday loans is that if the repayment is not made on time, they can lead to a debt trap. So repay them as soon as possible.
Why do they work?
Lenders focus more on your ability to repay once you receive your salary rather than your earlier payment records.
Co-Signed Loans
If your credit score is too low for approval, you can get help applying with a co-signer. This can improve your chances of getting loans approved. A co-signer with a good credit history agrees to take responsibility if you fail to repay. A co-signer can be your parent, spouse, or a close relative or friend. In this case, one of the benefits is that you may be able to access higher loan amounts and better interest rates compared to those applying alone. If you back out, your co-signer’s credit score will also be negatively affected. So if you are confident with repayment, then only go with this option.
Why does it work?
This works because lenders are more confident when someone with a strong financial background guarantees your loan. This reduces the risk, making it easier to qualify for loans for bad credit.
Peer-to-Peer (P2P) Loans
Peer-to-peer lending platforms are now increasingly popular in India. These loans directly connect borrowers with individual investors willing to lend money. It is one of the good platforms through which you can apply for loans for bad credit. These platforms consider factors beyond credit scores, such as your income, employment status, and repayment ability. The benefits include access to funds even with a bad credit score, fast approvals, and fewer formalities. But the interest rates may be higher, depending on the level of risk assessed by lenders. Some platforms may even charge service fees.
Before moving to any P2P platforms, compare multiple P2P Platforms to find the best terms provided and confirm whether the platform is registered with the RBI.
Why does it work?
As the decision is made by individual lenders or investors, there is more flexibility in evaluating your profile compared to traditional banks.
Microfinance loans
Microfinance Institutions (MFIs) are mainly designed to support low-income individuals and small businesses who lack access to traditional banking services. These loans are provided in smaller amounts, and they also have more flexible eligibility criteria. They provide flexible repayment schedules and easier access to credit. They are suited for small business needs, household improvements, or education expenses. Check whether the microfinance is recognized and regulated, as unregulated lenders may impose high interest rates. Individuals with low credit history or those with a bad credit score who cannot get loans from banks can apply.
Credit builder loans
Some financial institutions provide credit builder loans that are designed for people with low credit. The loan amount is held in a bank account, and you make monthly payments toward it. Once the repayment is finished, you get access to the funds. Apart from giving you funds, these bad credit score loans also help improve your credit history over time.
Important things to remember before applying
While it is possible to get loans for bad credit, it is equally important to be careful about these points.
- Expect high interest rates.
- Borrow only what you need.
- Avoid loan traps or scams.
- Work on improving your score.
Conclusion
Having a bad credit score can feel limiting, but it does not completely close all the options. Multiple pathways are mentioned above through which you will be able to take loans for bad credit and access funds when you need them. However, the only drawback is that bad credit score loans usually come with higher costs and strict conditions. The key is to borrow responsibly and make timely repayments. The ultimate goal is not only to get approved, but to gradually improve your credit score. With consistency, you can rebuild your financial credibility and unlock better loan opportunities in the future.
