Getting access to credit may seem easy these days with banks advertising about so many loan products and credit cards every day. However when one actually applies for a loan, he may find that getting a loan may not be just as easy especially if he has a poor CIBIL score. A CIBIL score of 750 (out of 900) is considered satisfactory by lenders.
With the central banking authority of India, RBI having made it mandatory for lenders to look at an individual’s credit score as a part of his credit assessment process, a person with poor CIBIL score may find it difficult to get access to formal credit from lending institutions. This makes it absolutely necessary for any individual to make a continual attempt at improving his CIBIL score. So are there no loans for bad credit score? That may not be necessarily true.
In recent times there has been a spurt in a lending process called peer to peer (P2P) lending that can indeed be a boon to people with a poor credit score. Simply put it the process of an individual lender giving out a loan to an individual borrower ad charging an interest for the same. In India P2P companies have risen significantly over the past few years.
Poor credit score? P2P lending may be the right solution for you
Currently there are about 30 P2P lending start-ups in India, from where an individual can get loans ranging from Rs 25,000 to Rs 30 lakhs. The tenors on such loans can range from 6 months to 5 years and the interest on such loans can vary from 12% to 36% depending upon the credit profile of the individual. The question that one is most likely to ask at this point is how is P2P loan better as a loan for low credit score? The answer is, while P2P lending portals will look at your CIBIL score, they may not reject your application on account of a poor credit score.
Young people often fumble with credit handling in the earliest days, where they may turn delinquent on a loan or more often than not on a credit card. Not only does it leave a mark on the CIBIL report, the individual may find it difficult to enhance his credit score even after putting in a lot of effort to make amends. If a need for credit arises in the meanwhile, he may find formal lending institutions closing doors on him, on account of his poor CIBIL score. This is when a P2P lender may come to his rescue.
The lending process
If no bank or NBFC is giving you a loan on account of your low credit score, you can approach a P2P portal of your choice and register yourself as a borrower. You will then be required to state your requirement for the loan and provide the necessary documents such as your bank statements, your CIBIL report your salary slip, your employer’s details. The lender will look at your documents and assess your credit worthiness based on your profile and intent. Even if your credit score is low, a P2P lender is likely to look at other factor such as your salary, the credentials of your employer and also your social status.
Based on your credit assessment which places a high value on your social score, the lender may give you the whole or a part of the loan that you have stated in your requirement. You are required to pay a one-time processing fee similar to a bank that may range from 0.5 to 1.5% of the loan amount. Like a bank or a NBFC there is fixed date stipulated on which you will be required to pay the EMI and in case of a delay or non-repayment additional penalties will be charged that may go up to 24% per annum.
The risk factors
While a person with a low credit score can indeed benefit from P2P lending as he gets a loan for a low credit score, there is a high risk factor attached to it, as there is no regulator currently regulating this space, although media reports suggest that the Reserve Bank of India is aware of the rising popularity of this platform. The risk is therefore palpable for both the lender and the borrower.
While a lender can put in any clause or condition that may not be in the best interest of the borrower, while a lender has no way of knowing whether the borrower in question is overleveraging himself but going to many such platforms and taking small loans from each. As P2P lending is not recognised as a formal lending process, the details of the same do not get recorded as credit information in one’s CIBIL report, therefore lenders too must tread carefully.
While there is no safety net in place as of now, there is a palpable expectation that a regulatory framework will be put in place sooner than later. Till then, borrowers with a poor credit profile may make best use of this platform to get a credit line. However, even if you are utilising the benefits of P2P lending you should not cease your efforts to improve CIBIL score. By increasing your credit score, you will improve your chances of getting access to formal credit in the future.
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