A financial crisis over a prolonged period of time can result in an inability to pay pending loans, which can then lead to a bad credit Loans. A financial crisis could even lead to borrowing multiple loan products at the same time, which may reflect on your credit score and affect your ability to get another loan. Over a period of time, you will get plenty of opportunities to resolve bad credit issues by paying off pending loans and automatically clearing out a negative credit track record. However, what relief do you have at hand, when you require a loan product in spite of bad credit?
To answer this question, this article aims to shed light on the subject of bad credit loans. Read further to know more.
Negative Credit Scoring
A bad credit history is indicated by your credit score. A negative credit score of anything below 750 in India, makes you a liability for traditional lenders. By liability; one means, lenders would consider individuals with a bad credit score unqualified for loan products, as a negative credit score indicates failure to pay off loans in time, or an existing loan burden that may result in an inability to pay back a new loan in due course of time.
All of the information above may make it seem like there is no recourse for those with bad credit scores to avail of loan products, but this is not true. While traditional lenders may steer clear of those with bad credit scores, many banks and NBFCs have customized loan products to meet the financial needs of those with low credit scores. These loan products include both secured and unsecured loans.
Secured and Unsecured Bad Credit Loans
While not every bank or NBFC may be willing to lend to those with bad credit scores, those with poor credit history do have limited access to both secured and unsecured loans.
Secured Bad Loans
If you have a valuable asset in your possession such a home, plot of land, jewellery, stocks and bonds, you may be able to avail of a secured loan product even with bad credit. However, your assets or assets will be considered as collateral by the lender. In case of a failure to pay the loan in due course of time, the lender can, and often will take possession of your assets as a means of recovering the loan amount that was disbursed to you.
Unsecured Loans
It may be more difficult having access to an unsecured loan if you have poor credit. However, it is not entirely impossible. While banks are unlikely to approve unsecured loans for those with a poor credit history and credit score, many well-known NBFCs are more open to the idea. An unsecured loan is a loan type wherein you do not need to offer up an asset as collateral.
Higher Interest Rates
It is very likely that when you acquire an unsecured loan in spite of bad credit, you will be expected to pay a higher interest rate alongside your regular EMIs. This is a standard with most banks and NBFCs willing to lend to those with poor credit.
What are Your Options?
In India, your best chance of availing a bad credit loan is by offering up an asset as collateral. Legitimate banks and NBFCs are more likely to lend those with bad credit, if loan repayment can be guaranteed by possession of assets in the worst-case scenario. As such you have multiple options for bad credit loans of the secured kind, as indicated in the infographic below.
| Loan Type | Nature of Loan | Collateral |
| Mortgage Loans | Loan against your home or a plot of land | Home/Plot of Land |
| Car Loans | Loan to purchase a car | Your Car |
| Business Loans | Loans to finance or support a business | Your Business |
| Home Loans | Loan to purchase a home | Your Home |
How Secured Bad Credit Loans Differ from Other Loan Types
While a secured loan is your best chance of availing of a loan in spite of bad credit, there are very apparent differences between loans offered to individuals with a poor credit score and to those with a regular or good credit score. These differences are as follows…
- Collateral secures the loan on your behalf and provides lenders with the assurance that repayment of the loan amount is guaranteed
- Loan amount is high and in keeping with the value of the collateral offered
- Interest rates are low but not as low as those availing of loans with a good credit score in tow
- Loan tenure is flexible with the borrower’s best interests in mind
- Available to non-salaried individuals
- Interest rates are fixed or floating
Debt Consolidation
Consider getting a secured loan in spite of bad credit for debt consolidation. If you are currently burdened by loan payments to various banks and NBFCs, consolidating your debt in one place may work out to your advantage. This is especially true for bad credit loans of the secured variation, wherein you can avail of a big loan amount based on the value of your assets and consolidate all debt in one place.
Alternatives to Traditional Banks and NBFCs
If debt consolidation is not an overwhelming need and you need a loan product to meet a temporary and small financial need, consider these alternatives to bad credit loans offered by banks and NBFCs.
PayDay Loans – Payday loans are available to those with bad credit scores, to meet emergency and immediate financial needs. The loan repayment tenure generally lasts from 30 to 90 days and the interest rate could be as high as 1% per day. But, when in a tight spot, payday loans can meet small financial needs for those with bad credit.
Peer to Peer Lending –Peer to peer lending works well for those with bad credit. This form of lending involves one individual lending to the next, under the aegis of an online lending platform.
In conclusion, bad credit loans may not be easily available but are not entirely impossible. The information above could help individuals with poor credit score secure a loan when it is most needed.
Read Also: Everything You Ever Need to Know About Your CIBIL (Credit)
