Whenever you apply for a loan, whether it is an all-purpose personal loan or a home loan for your housing needs, your credit score plays an integral part in getting approval for your loan application. Lenders use the credit score to judge the prospect of their loans being repaid without defaults. Lenders seek a score of 650 or above to sanction the loan. The higher your credit score, the better would be your chances of availing the home loan.
But what if your credit score is bad?
In the case of a bad credit score, your loan application would be rejected. However, if you don’t want the application being rejected, here are a few steps which you can take –
- Improve your credit score before applying for the loan
The first step you should take to avoid loan rejection is to try and improve your credit score. To improve your score, rectify your repayment defaults. If you are thinking of applying for a loan shortly, start paying off your liabilities within their due date. As your repayment history improves, your credit score would also improve. Other ways to improve your credit score include the following –
- Lower your credit utilisation ratio by limiting your credit spends. As your credit spends become low against the credit limit allowed to you, your credit utilisation would fall, which would be beneficial for your credit score.
- Avoid having too many loans as an increased debt also increases the chances of repayment default as well as your credit utilisation
- Avoid making too many loan applications as each application would result in a hard enquiry into your credit score. Too many enquiries damage the score and should be avoided
Improve your credit score using these tips and you can avail a loan easily.
- Opt for a lower amount of loan
If your credit score is low, lenders will not allow you the loan. However, you can negotiate with the lender and opt for lower loan amounts, which might be approved at lower credit scores.
- Choose a lender with whom you have an existing relationship
When you have a current relationship with a financial institution for a long period, the institution views you as a loyal customer and allows you various benefits. One such benefit might be the approval of your loan application at lower credit scores. So, try and apply for a loan with a bank whose customer you have been for a long time. You can negotiate with the bank to arrive at mutually acceptable loan terms even when you have a low credit score.
- Opt for a co-borrower
A co-borrower also called a co-applicant, increases your loan eligibility. Since the co-borrower also has an income and an independent credit score, your bad credit score gets averaged out if the co-borrower has a high credit score. As a result, your loan application is viewed more favourably by lenders. Moreover, as the co-borrower’s income is added to your own, your loan eligibility also increases. So, to prevent your bad credit score from jeopardizing your loan application, get a co-borrower to co-borrow the loan with you.