Credit score and loans! Is it possible to get a loan with poor credit scores?
A credit score is the numerical representation of your credit history. It contains every single detail of all the credit you have acquired over the years. A credit score represents your creditworthiness and banks look to your credit score before granting loans and credit cards. A good credit score not only ensures that you get approved for loans and credit cards but it also gives you the opportunity to avail the best rates and a bad credit score will send your application to the rejection pile.
What affects your credit score?
Let us look into some of the major factors that affects your credit score:
- Payment history: Making a late payment might not seem like a serious offence but it can definitely harm your credit score. Making late payments or missing payments on your loans and credit cards can bring down your credit score dramatically. Every missed/late payment is recorded in your credit report and remains there for a period of up to 7 years.
- Current debts: Carrying a lot of debt can also decrease your credit score.
- Types of current credit: It is important to have the right mix of credit products in order to keep your credit scores up. Having the right balance between credit cards and loans will ensure that your credit score is not affected.
Consequences of a poor credit score
Listed below are some of the major consequences of a poor credit score:
- High interest rates on credit cards and loans: Banks consider applicants with low credit score riskier than applicants who have a good credit score. They compensate for the risk by making you pay a higher rate of interest on loans and credit cards if you have a low credit score.
- Rejection of credit card and loan applications: While some banks compensate for the risk factor with high interest rates, other banks will reject your application for a loan or credit card if you have a bad credit score.
- High insurance premiums: Insurance companies check credit scores too. They connect a low credit score to high claims which in turn leads them to charging a higher premium.
Is it possible to get a loan with poor credit score?
Banks and financial institutions are cautious while granting loans to an applicant with a low credit score owing to the risk factor. But despite what many think, it is not impossible to avail loans with a low credit score. An applicant with a low credit score can still get approved for a loan. Read on to know how:
- Secured loans: Under the secured loan option, a loan is granted to the individual against a collateral security. The value of the collateral security should match the principal loan amount to an extent. Banks are less reluctant to offer secured loans to applicants with a bad credit score as they have something to fall back on in case the applicant fails to repay the loan. Secured loans are usually offered at a regular rate of interest regardless of whether the applicant has a high or low credit score.
- Unsecured loans: Unsecured loans are best suited for individuals who are incapable of offering security to the lender. Banks and financial institutions offer unsecured loans to customers with a low credit score without requiring any security. These loans come at a higher rate of interest to make up for the risk factor. These kind of loans will end up being very expensive owing to the high rate of interest.
Getting loans with a poor credit score is definitely tough, but not impossible. It is important to read the fine print of the documents before signing a loan agreement. While these options might help you get a loan, it is best to improve your credit score so that you can get approved for regular loans without any hassle the next time you apply for it.