Loan disbursement by banks and financial organizations depends on a number of factors.
Credit score, credit history, and timely EMIs are some of the crucial factors that determine whether an individual is eligible to get a loan.
If you have a bad credit score, banks will be less inclined to lend you money. It is because you will be at a greater risk of defaulting on the loan. You are, however, still eligible to receive a loan provided you pay a high rate of interest. Such loans are called bad credit loans.
Bad credit loans charge excessive rates of interest owing to the risk factor involved in the situation. This high interest rate combined with the inflexible repayment periods is likely to leave you in a more strenuous financial position.
We have tried to enlist 7 alternatives to bad credit loans at the time of a financial crisis. While some banks and financial institutions might coerce you to enter precarious financial dealings, be sure to settle for a loan arrangement that you can comfortably repay and make an informed decision.
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Top 7 Alternatives For Bad Credit Loans
1. Secured Loans
If you need a large amount of money, secured loans are a more viable option than short-term loans.
A secured loan is one where you are required to pledge collateral in order to obtain the loan. The collateral you provide will be seized by the lender, which will become their property if you fail to meet the repayment terms.
Since you will need to pledge security, this is a relatively less risky venture for the lender in comparison to unsecured loans. Therefore, you’ll be in a better position to negotiate and settle on a lower interest rate than the rates generally charged on bad credit loans.
2. Unsecured Personal Loans
Unsecured personal loans are those loans that don’t require collateral/security.
Because they are unsecured, these loans usually charge a high rate of interest in comparison to secured loans.
However, its flexible features make it a highly lucrative option because of the non-specific nature of its usage. It can be used to meet any personal or professional financial requirement without the need to provide the exact cause behind applying for the loan.
This makes the process of loan application swift and hassle-free. Additionally, its quick disbursement period and minimal paperwork make it a go-to option during times of financial emergencies.
For these reasons, personal loans are difficult to get without a good credit score which would assure the lender of the borrower’s creditworthiness.
However, many NBFCs and online lending companies like Money View offer personal loans at remarkably low-interest rates as long as one has a minimum CIBIL score of 650.
If you have a bad credit history, showing proof of stable income can help you boost your eligibility and obtain a personal loan.
3. Overdraft on your Current Account
An overdraft facility is basically a credit extension facility where the bank or financial institution under which you have the current account allows you to borrow some cash under specific conditions.
All conditions of repayment are set by the lender, as is the overdraft amount.
This is different from a loan application because it is simply an extension of your service with the bank through your existing current account. The money is credited to an existing account that you have under the bank.
Obtaining an overdraft is both quicker and more straightforward since the bank is already aware of your financial status and credit position. A certain limit is set on the overdraft amount, exceeding which might lead you to pay high interests and penalties, which can be a costly affair.
However, because of your existing relations with the bank as an account holder, it is sometimes possible to avail a zero percent interest rate on an overdraft up to a certain amount as long as you repay the concerned amount of money within the specified tenure.
4. Loans from your Existing Financial Provider
Most banks and financial institutions give out loans based on the borrower’s credit score, which approximately signifies the borrower’s ability to repay the borrowed amount within time.
Apart from a good credit score, another factor that can assure the lender that the borrower won’t default on the loan is their financial situation.
If the individual has a stable income, they will pay timely EMIs, which increases their loan eligibility.
Applying for a loan with your existing financial provider, whether a bank or NBFC, would mean higher chances of getting a loan at lower rates and even with a low credit score. It would be easier to convince them of your financial stability owing to your existing relations.
5. Peer-to-Peer Lending Platforms (P2P)
Peer-to-peer lending platforms are online registered platforms that facilitate interactions between borrowers and lenders.
Their technology-driven, progressive vision of the digital marketplace aims to provide borrowers with the lowest interest rates and lenders with the maximum outcome on their investment.
It proceeds through safe KYC registration to bring together a community of individuals for more effective financial dealings. One can even borrow from several lenders to raise the total required amount.
Terms of repayment and tenure are flexible even for borrowers who have a bad credit score. These forums work on the principle of crowdfunding which makes it easy for individuals to borrow money without stringent eligibility requirements of credit score and repayment history.
6. Loans from Digital Lenders and Non-Banking Financial Companies (NBFCs)
Today, many NBFCs are working both digitally and offline to make borrowing money easier for individuals.
Their flexible borrowing terms extend credit facilities even to individuals with a low credit score. NBFCs and digital lenders give out personal loans, too, at low rates of interest and long tenures. Money View is one such lucrative personal loan solution that offers easy personal loans through its app or website.
Digital Lending works through community-operated platforms that outdo traditional banking operations in a number of ways. Their eligibility conditions are lenient, and loans are disbursed within 24-48 hours of application.
7. Credit Cards and Line of Credit
A credit card is another option that is available to those even with a bad credit history.
While you may be able to avail of credit and get access to money, credit cards can be an expensive deal on the whole. The interest rates may be exorbitant with lower credit limits, which altogether can prove to be a severe financial burden in the long run.
Credit cards also charge cash advance charges. All of these reasons account for why only 4% of the Indian population has access to them despite their vast availability.
Both credit cards and lines of credit are more suited as buffer options to meet urgent short-term monetary requirements, which can be paid back within a short period.
A common example is when some urgent cash is required to make a business investment or pay salaries.
Businesses avail the line of credit facility under such circumstances so that the money can be repaid within a short period once the revenue from the previous month is received.
In order to meet urgent periodical requirements, a line of credit is a more viable and cost-effective option than a credit card.
These options can prove to be good alternatives to bad credit loans. Before deciding on a loan, compare the interest rates of various banks/NBFCs to land with the best deal available. Judging your financial situation is also imperative before you zero in on a particular type of loan.