A bad credit score occurs due to multiple reasons that can range from serious to inconsequential. Defaulting on a previous loan or simply forgetting to pay your credit card bill can equally cause major dents in your credit score.
In many cases, payments are not done due to genuine reasons. Medical emergencies can create a cash crunch, and you might decide to delay your credit card payment. Or there could simply be an administrative glitch causing your credit report to carry the wrong information, and your credit score can be affected for no fault of yours.
For your bank loan process to be relatively smooth, your CIBIL score needs to be over 750 points. According to CIBIL’s statistics, 79% of loan applications from individuals with a score above 750 are approved. For the bank, this important score is what determines an individual’s ability to pay back the loan. It impacts the interest rate as well – the higher your credit score, the better your interest rate.
What’s more, if you are considering joint ownership then the co-owner’s credit score will need to be stellar too for hassle-free loan approval. But given so many things that could go wrong, getting that perfect score is not an easy task.
So, what would you do if you do have a not-so-perfect CIBIL rating? While the best scenario is to improve your credit score in the coming months, it might not always work. Here are a few alternatives you can consider.
Go for gold
The RBI states that up to 75% of the value of gold ornaments can be given out as loans, which would serve perfectly well in this scenario. Pledging your gold ornaments guarantees you easy and quick cash with no other documents required. The money can easily be used to boost your down payment, which in turn will reduce your loan amount required making it easier to secure it.
Aim for a low FOIR
One of the things you have to reconcile yourself to in the case of a low credit score is that you might not get the loan amount that you are looking for. The Fixed Obligations to Income Ratio (FOIR) is a parameter used by banks to check the loan eligibility of the applicant.
It takes into account your current financial obligations including EMIs from other loans, credit card payments and so on but excludes fixed deductions like provident fund, taxes, and insurance. The normal FOIR rate that a bank fixes for a home loan can vary from 45% to 50%, although this can potentially differ from bank to bank. Banks can consider your eligibility through FOIR and still give you a home loan, albeit a lower amount.
Choose stable guarantors
If you are going for a joint loan, you can offset your poor credit rating by making sure that the person who is co-signing the loan with you has an exemplary credit score. The other option is to for a third person with a good credit score to stand as a guarantor, although this might be tricky given the risks to the person involved.
Opt for alternative sources
It is important to know that having a low credit score does not shut you out of the home loan race completely. Approaching Non-Banking Financial Companies (NBFCs) and Housing Finance companies might be a better option as these institutions take into account other factors in addition to your credit rating. However, you have to be prepared to pay higher interest rates when compared to banks.
Bulk up the down payment
One of the best ways to increase your chances for loan approval is to try and step up the amount for your down payment. Doing this reduces your Loan-to-Value (LTV) ratio and enhances your chances to avail a loan. The LTV is defined as the ratio of the loan assessed against the value of the property, and it can range anywhere from 75% to 85% of the asset’s value. A high LTV means a bigger loan amount and therefore a lower down payment. When you have problems with your credit score, rustling up a larger amount for a down payment might be the way to go.
Negotiate payment tenure
A good credit score gives you a comfortably long tenure to repay the loan amount. But when you are struggling with your credit rating you could negotiate with your bank to sanction your loan with a shorter repayment tenure or a higher interest rate.
Leverage other financial track records
If you have been making timely payments for other loans, then you can leverage them to your advantage as proof of clean financial records. Banks might decide to give you better interest rates or disburse a bigger loan amount if they are convinced of your ability to make payments on time.
The process on how to get loan from bank is one of the easiest and the simplest way. Keep sharing more such insightful and helpful information.