We come across many situations in life where looking for financial assistance becomes inevitable. Be it emergencies or managing the ever-increasing costs, loans have become an integral part of our lives today. When you decide to avail a personal loan, there are many roadblocks that you need to cross. Finding which loan provider offers the best rates, hoping that your credit profile matches their requirement, submitting all documents required and keeping your fingers crossed till you get the loan approved and disbursed. There are many checks conducted by lenders before approving loan requests like income, credit profile, place of residence, etc. In this article we will look at options available to borrowers who are looking for a Personal Loan but have a weak credit record.
What is a Credit Record?
Let’s say that you had taken a loan five years ago and repaid it without delaying/ missing a single instalment. Also, you use a credit card regularly and have never defaulted on your payment. Most lenders will be comfortable lending to you as against someone who has a history of defaults. The details about all previous loans taken by you and your repayment behaviour are captured in your Credit Record.
There are many institutions that maintain these records. In India, there are four major Credit Information Companies:
How to get a Personal Loan with a Weak Credit Record?
These companies maintain the repayment records of borrowers and provide reports and scores to prospective lenders. Most lending institutions peg a lot of importance on the credit score of a borrower to determine loan eligibility.
Introducing Peer to Peer Lending
Around a decade back, an alternative lending-borrowing cycle was introduced to the market by using technological platforms. Fintechs, or financial services offered as an end-to-end process via the internet started evolving and the loan market was all set to change. Here is a quick glimpse of the traditional borrowing-lending cycle:
Traditional lending-borrowing cycle
Investor ->Deposits funds with a bank ->Earns returns of ~7-8%
Bank ->Lends funds to borrowers at ~15-16% ->Earns the difference between interest rates.
Fintechs created a platform (P2P lending platform) that enabled borrowers to avail loans from investors directly, without the intervention of a bank or a lending institution.
P2P lending platforms
Investor ->Connects with borrowers through P2P platforms ->Lends funds to borrowers ->Earns a higher rate of interest depending on the risk involved
Borrower -> Can apply for a loan even if the CIBIL score has been adversely affected for some reasons -> Pays interest proportional to his/ her credit score.
How do P2P platforms determine the creditworthiness of borrowers?
Banks and other financial institutions have a graded credit rating system. On the other hand, Peer to Peer lending platforms, like People Lend, have a proprietary credit rating system which takes a wide range of information into consideration before associating a risk class with your profile. The information taken into account is:
This ensures that your credit profile is assessed in a holistic manner as opposed to a graded manner followed by traditional institutions.
How to apply for a Personal Loan with a Weak Credit Score?
Borrowers with a weak credit record and those with no credit record now have an opportunity to avail a loan. Unlike the minimum credit score requirement of banks and other financial institutions, Peer to Peer lending platforms look at your complete profile to determine the risk class. Also, an interest rate range is associated with your profile based on the risk class.
In a nutshell, for all borrowers who are looking for a personal loan but have a weak credit record, peer to peer lending platforms offer a huge relief. Being an online platform, you don’t need to visit the branch several times for your application to be ‘logged in’. All you need to do is visit the website, register as a borrower, submit documents and input your loan requirement.