Imagine a young professional who has never taken a loan in his life or used a credit card. He is happy living within his means and fortune has been kind on him by not putting him into situations where availing a loan is his only choice. However, as he grows older, certain exigent situations put him into a spot where he needs to avail a Personal loan. He approaches his bank and submits an application for the loan. However, his application gets rejected. Why? Because he has no credit history. Sounds unfair, doesn’t it?
The Irony of not having a Credit Score
First things first, a credit score is calculated based on your credit history, utilization of credit, how many secured and unsecured loans have been availed by you and the number of applications for credit made by you in the past, to name a few factors. In simpler words, it is based on how you have dealt with credit in the past. Also, most credit bureaus refer to records of the latest three years.
So, when a borrower who has never taken a loan or any credit applies for one, the bank / financial institution receives a no credit score available report from CIBIL or other similar credit bureaus. Thereby, the bank is not in a position to assess the risk associated with lending funds to you. Hence, working with due diligence, it denies your loan application.
So, you need to be a borrower and repay your loans on time to be able to get a loan. But to be a borrower you need a loan to begin with! There stands the irony!
What can a first-time borrower do?
Traditionally, borrowers applying for loans for the first time, were recommended to either approach a bank that they have been banking with for years or look for a secured, collateral-based loan. Getting a personal loan sanctioned was very difficult if the borrower didn’t have a credit score. By availing a secured loan and repaying it in time, they could start their credit history and get themselves a healthy credit score.
However, this was more like a work-around than a solution to the problem faced by young borrowers.
Online Peer to Peer Lending
In such a landscape, there was a need for a borrowing alternative for people with no credit history or credit score. As digitization opened the doors of innovation and democratization of various products and services, fintechs started evolving, offering financial products as an end-to-end service over the internet.
A few years ago, fintechs launched a new way in which borrowers could access funds by creating a platform where Retail Investors could lend funds to Retail Borrowers without the intervention of a bank or a financial institution, known as Peer to Peer Lending platforms.
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.
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.
The important thing to note here is that P2P platforms don’t determine your loan eligibility based on the credit score alone. They look at your overall credit profile which includes your location of residence, trends in expenditure, employment history, credit score (if available) and other factors to assign a risk class to your profile. Then they attach a range of interest rate, based on the risk class, and you can avail a personal loan at an interest rate than falls in the range.
Applying for a personal loan with a P2P platform like People Lend, is simple:
Here is an overview of the entire process (registration to repayment):
If you don’t have a credit history or a credit score and are finding it difficult to avail a personal loan, then P2P lending platforms can help you get the funds in a fast, simple and easy manner at interest rates commensurate with your credit profile. Also, once you avail a loan from a P2P platform and repay it as per schedule, your credit history gets updated and a credit score gets assigned to you. No more working-around simply because you have not taken a loan or credit before – register as a borrower with a P2P platform and get the funds you need.