Loan Basics. Lenders of the last resort

Your credit score plays a vital role in determining whether you get a loan. Typically, a poor credit score is more likely to end in the rejection of your application, especially if you have applied to banks. What are your options in such cases?

If your need can be postponed a bit, you can easily work towards improving your credit score. Else, you can explore avenues outside of banks. But given that all the options are costlier than regular bank loans, it is necessary to use them sparingly.

The first thing you should know in case your loan is rejected by one institution because of low credit score is that you must stop applying to other places. The reason is that, too many applications will increase the possibility of more rejections which will turn your credit score from bad to worse. If you can postpone taking a loan by six months to a year, you can use this period to improve your credit score. This can be done by making regular repayments of your existing loans and not defaulting on them, or by consolidating the many loans that you may have into one. You can even consider borrowing from your friends or family to close your existing loans.

If you have too many credit cards, reduce the number of cards; do not use more than 30 per cent to 40 per cent of your credit limit on the card. Pay your credit card bills fully and regularly and do not make any partial payments. Even if your credit score does not improve significantly over this period, the discipline you have maintained will increase the possibility of a new loan getting sanctioned. This is because many institutions do not give more weightage to the negatives in your credit history which are more than 12 months or so.

If you need the money immediately, getting a loan from bank may be a tall order if you have a bad credit score. But few non-banking financial companies (NBFCs) may come to your rescue. However, NBFCs may treat a borrower with a low credit score differently from the others. For one, they may charge higher interest rates. Experts say that a borrower with a good credit score can get a loan at 11-17 per cent; but for a borrower with low credit score, the interest rate begins from 18 per cent and goes up to 28-30 per cent in some cases. That said, some NBFCs offer a fixed interest rate irrespective of the nature of the borrower too. Secondly, borrowers with low credit score may also need to have a co-applicant or provide some collateral as a security. Other charges like the processing fee etc also are also slightly higher with some institutions.

A second option is peer-to-peer (P2P) lending. Here, a third-party individual lends to a borrower through an intermediate platform. You will have to register at the P2P platform for a fee that ranges from ₹500-1,500.

After getting all the necessary information such as your identity and address proof, income statements, tax statements, etc through a KYC process, the platform will match you with the lender. The interest rates range from 12-30 per cent for a tenor of three months to 36 months.

The loan processing fee will wary depending on the interest rate you get. Lower the interest rate, lower the processing fee. Faircent, LenDenClub, Lendbox, i-Lend are some of the P2P platforms available in the market now.

Apart from NBFCs and P2P lenders, there are some online intermediaries that have a tie-up with banks. For instance, Qbera.com has a tie-up with RBL Bank and disburses the loan through the bank.

Obtaining a loan from a NBFC is better when compared to approaching a P2P lending platform.

The first reason is that NBFCs are regulated by the RBI whereas P2P lending is not. Secondly, a regular repayment of an NBFC loan will help improve your credit score. Vikas Kumar, co-founder, LoanTap, says “In case of a P2P, you directly borrow from another third-party individual who is neither regulated nor reports to the credit bureau.

So, a poor credit scorer will continue to remain poor if an individual borrows through a P2P platform. Whereas your loan will be tracked if you borrow from a NBFC and a disciplined and regular repayment can improve your credit score”.

Besides, P2P borrowing/lending may be a high risk activity as there is no mechanism for redressal in case problems arise. The RBI though is likely to come out with final guidelines for P2P lending in a few weeks and bring it under its purview soon.

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