How to apply for a loan against property with bad credit

The primary requirement to procure a loan of any nature is a good credit score. A credit score is a three-digit number 300 to 900, ranging from assigned by the Credit Information Bureau to every individual depending on their credit history. A higher number denotes good credit health.  Applicants with a good credit score, ideally above 750, can easily get away with a sanction for any credit product as they are considered Blow risk borrowers and are in great demand.

What about applicants who do not have a good credit score? Some financial institutions consider loan applications from these candidates or quick business loans for bad credit businesses but only with collateral security like property, LIC bonds or Fixed  Deposits. Such loans will be priced higher as the risk attached to such lending is high as well. The lenders are always sceptical about the recovery of the loan when the candidate does not have a good credit history. To mitigate this risk, they insist on a backup source that will enable them to liquidate the loan. The parameters that impact the credit score are:

  • The repayment history
  • The tenure of the loan
  • Usage of the credit limit
  • Combination of secured and unsecured loans
  • Submission of multiple  loan applications at short intervals

Any unfavourable movement in any of the above parameters will significantly impact the credit score. Before applying for loan programs for real estate investors, you will have to draw the credit report and study where you are lagging and set the issue to improve the score.

How to apply for a  Loan Against Property with a bad score? 

You should consider the following while applying for SBI Loan Against Property. Availability of collateral security will increase the probabilities of getting loan approval, But considering the following will make it much more manageable. 

  • Clear all the overdue in the loan accounts

Repay all the long pending EMIs and credit card dues to upgrade the credit score.

  • Use the credit  card limit judiciously:

If the health of the credit score has to be maintained, you should restrain from using the credit card limit to the full. Lenders will infer that you largely depend on credit for your expenses as you do not have sufficient financial resources. This will negate the chances of loan approval. Limit credit card usage to just about 30% to give a better image of your finance management.

  • Consult your existing lender

The applicant should consult the existing lender to repay all the pending dues and obtain a NOC. You can produce the NOC as proof for getting issues resolved with the Credit Bureau and ensure that the credit score is upgraded.

  • Apply for a loan with the existing lender

Suppose you have a good relationship with your existing lender and have a good track record in loan repayment terms. In that case, you should contemplate applying for a loan against property with the existing lender.  You will be able to convince the lender about the reasons for the bad score. The chances of getting the loan approval from the existing lender even with a bad credit score are brighter owing to the excellent relationship and track record in the past.

  • Explore various options

Even though it is challenging to get approval for a loan with a bad credit score, some lenders still consider such applications when backed with sound collateral security like an immovable property.  While HDFC  considers a credit score of 750 and above excellent, you can still apply for HDFC Loan Against Property with a score between 650 and 700 as the proposal is backed with collateral security. Similarly, SBI considers an application for  SBI Loan Against Property even when the score is as low as 650. You can apply for LAP with either of these banks and enhance the chance of getting financial assistance. You may also opt to obtain and choose from a list of loan lenders offering home loans backed by USDA financing which requires a minimum credit score of 620 only.

  • Include a co-applicant

Apply for SBI Loan Against Property or HDFC Loan Against Property in joint names. Adding a co-obligant with a good credit score and stable source of income can be an advantage. Lenders will be convinced about the timely servicing of the EMIs as both the applicants will then be equally held responsible for the repayment of the loan.

  • Opt for a longer tenure

Opt to set a longer tenure to reduce the burden of EMI. This ensures that cash flow is not disturbed at your end and the loan is serviced promptly.

  • Provide proof to establish  the repayment capacity

The most significant risk the lenders will face by lending to applicants with a bad score is the loan default. They need to be convinced that you have enough resources to make prompt payments towards the loan.  Provide bank statements that show credits of annual bonuses, hike in salary or any other source of income that will reassure the lender about your repayment capacity.

Advantages of a bad credit Loan Against Property

The following are the advantages of a bad credit Loan Against Property:

  • Procurement of a sizeable loan to meet big-ticket expenses like medical exigencies, wedding expenses, overseas education, purchase of a property, refurbishing the existing property etc
  • Flexible tenure to lower the EMI burden and enable prompt repayments.
  • Scope to improve the credit score by making regular and timely repayments of the loan against property.

Disadvantages of a bad credit Loan Against Property

  • The glaring disadvantage is that though some financial institutions consider approving the loan against property despite a bad credit score, a higher interest rate is charged. The lower the score, the higher will be the interest. This will increase the cost of the loan.
  • Besides the rate of interest,  the other charges levied on a bad credit LAP will make the loan dearer.

Factors to be kept in mind while applying for a LAP with bad credit

The following must be kept in mind while applying for a loan against a property with bad credit.

  • The rate of interest and other charges will be higher than the loan with good credit.
  • Defaulting the EMI payments will decline the score further and will negate the possibilities of loan approvals in the future.
  • Submitting an ECS mandate to ensure regular payments of EMI and also maintaining sufficient balance in the account within the due date to avoid ECS rejection.

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