How to Get a Personal Loan/Home Loan with a Low Credit Score?

Last Updated : Jan. 17, 2025, 6:06 p.m.

Credit scores play an important role in the processing and approval of personal loan/home loan applications. It is an important criterion that banks require to determine whether or not to approve your personal loan or home loan application. When you submit your loan application, the financial institution will review your credit score and credit history. If you have a low credit score, there is a high probability that your loan application will be rejected. If you have a high credit score, your loan application will be processed quickly. A score of 700 plus is considered excellent in India. All lenders will be ready to lend for this credit score. You can also negotiate with the lender for preferential interest rates and better loan terms. However, even if you do not have a good credit score, you can get a personal loan/home loan. Let us now understand how. Before that let us understand what a credit score is and how it works.

What is a Credit Score?

A credit score is a 3 digit numerical value between 300 and 900, and it summarizes your creditworthiness. There are 4 major credit bureaus in India which provide a credit score, and they are Equifax, TransUnion CIBIL, Experian, and CRIF HighMark. The credit bureaus in India collect information and data from banks and other financial organizations in India to evaluate your credit behavior and credit score. Generally, a credit score of 700 plus is considered favorable for personal loan/home loan approvals. However, again the minimum credit score required will vary across financial institutions. In general, the closer your credit score is to 900, the more favorable is your probability of getting your loan sanctioned.

How Does the Credit Score Work?

Credit bureaus consider the following factors to compute your credit score:

• Repayment History: Repayment history is a very important factor in computing your credit score. It accounts for 35% of your score. So, defaulting on your credit card bills or loan payments will impact your credit score negatively.
  
• Credit Utilization Ratio: The CUR accounts for 30% of your credit score. The CUR is the percentage of credit utilized from the total credit limit available. Higher the CUR, lower your credit score. For example, if your CUR is more than 70%, your credit score will be very low. This is because you are seen as highly dependent on credit. To get a good credit score, experts recommend a CUR within 30% to 40%. This refers to the extent of credit you use against the limit available to you.
  
• Credit Mix: Credit mix accounts for up to 10% of your credit score. It is ideal to have a diverse portfolio of credit like instalment loans, revolving credit, mortgages, etc. It is also important to maintain a balance between secured and unsecured credit.
  
• Credit Duration: A longer credit history without defaults can lead to a good credit score. Your credit history length makes up for 15% of your credit score.
  
• Recent Credit Enquiries: credit enquiries make up for 10% of your credit score. Each time you apply for credit, the lender with your permission makes an inquiry on your credit report. They do so to know about your financial status like repayment history, number of open accounts, debts, etc. Multiple hard inquiries can bring down your credit score. So, apply for credit only when required.

Free CIBIL Score Check

How Should You Go for a Personal and Loan If Your Credit Score is Low?

You can still get a personal loan or home loan with a low credit score. Here are some tips for the same

Take Efforts to Improve your Credit Score

If you fall short of the minimum credit score required for a personal loan /home loan, then your priority should be to improve your credit score. Follow a few simple steps like paying all your dues, rectifying errors in the credit report, and regularizing your EMI payments. This will help you improve your credit score.

Apply for a Joint Loan

You can apply with a co-applicant for a joint loan, especially for a home loan . Ensure that the co-applicant has a steady source of income and high credit score. This will considerably improve your chances of getting the loan approved. It will also increase your eligibility for higher loan amounts.

Apply for a Loan With the Existing Lender

You can apply for a personal loan/home loan with a lender with whom you already have some loans and a good credit reputation. So, when you apply with such a lender, the likelihood of getting a personal loan/home loan with a low credit score is higher.

Make a Higher Down Payment

Usually, the down payment required for a home loan is 20%. However, if you have a low credit score, you can make a higher down payment demonstrating your strong financial status. This will help you get loan approval easily and quickly.

The Pradhan Mantri Awas Yojana is an initiative taken by the government to provide access to affordable housing for people with low and moderate incomes. Are you considering an affordable loan under PMay? Then apply for a home loan under PMay

Do Not Apply for Multiple Loans

It is not a good idea to apply for loans from multiple lenders parallelly although you may be really eager to get your loan approved. This is because every time you submit an application, the lender will do a hard credit pull with the credit bureau. Multiple hard inquiries will bring down your credit score further. It will also indicate that you are highly dependent on credit and desperate. Also, do not venture to apply for another loan if your loan application is already rejected. Take steps to improve your score and then reapply.