If you plan to apply for a loan with a credit score of 550, banks and financial institutions are likely to reject your loan application. If your application is approved, you will be given a loan with a lower loan amount and a higher interest rate.
Taking the latter into consideration, i.e- how you can get the approval of your loan application with a low credit score, this blog will explain if you can/should apply for a loan with a low credit score, the disadvantages of having a low credit score, and how you can improve it.
Can I Get a Loan with a Low Credit Score?
Even if a person has a low credit score, he or she can apply for a loan. However, it is up to the lenders, banks, and financial institutions to approve or deny the loan application. Also, it is important to note that there is a possibility that your loan application might get rejected, which will then impact your credit score again. When a lower credit score is impacted again, a borrower may have to work hard for years to regain a fair/good credit score.
In general, a low credit score makes loan approval more difficult. This is because most banks, lenders, and financial institutions prefer a credit score of 750 or higher to grant a loan because it demonstrates the borrower’s financial health and ability to repay the borrowed amount. If you still apply for a loan with a low credit score, be aware that you will have to pay a higher interest rate on the loan amount, as well as have fewer credit opportunities to enjoy. However, if a borrower is in desperate need of a loan, he or she can connect with lenders who lend a loan with a low credit score.
What are the Disadvantages of Applying for a Loan with a Low Credit score?
Applying for a personal loan with a low CIBIL score of 550 is a disadvantage in itself. With a low credit score, comes a lot of other disadvantages attached.
- Firstly, lenders, banks, and financial institutions may reject a loan application based on a low credit score. Second, with each rejected application, the number of hard inquiries rises and the credit score falls.
- If an applicant is approved for a personal loan, he or she will be required to pay a higher interest rate in order to compensate for a low credit score.
- An applicant may be unable to obtain the desired loan amount. For instance- Suppose, Mr A applies for a loan of Rs. 1,00,000, but due to a low credit score, he might be given a loan of Rs. 50,000-60,000 (approximately)
What are the Factors that Affect Credit Score?
An applicant’s credit score may suffer as a result of the following factors:
- Poor/irresponsible repayment history
- Mis-management of credit utilization ratio
- Too many hard inquiries
- Missed, delayed or partially-settled payments
- Unhealthy credit mix
- Outstanding balances
- Issues in credit score
How to Improve your Credit Score?
There are numerous ways to improve one’s credit score, just as there are numerous factors that can affect one’s credit score. The following are a few practises that a borrower should follow in order to improve his or her credit score:
- Make credit payments on time
- Do not leave any outstanding balances
- Don’t settle the amount in parts
- Avoid making multiple hard inquiries
- Try to maintain the right balance between secured and unsecured loans
- Use the credit utilization ratio wisely
- File a dispute if there are errors on your credit report
- Maintain the habit of checking your credit report twice a year