Improve score, opt for secured credit card to tackle squeeze in issuances

If you are finding it hard to get a personal loan, try to get a collateral-based one

Obtaining credit cards and personal loans is becoming difficult. Media reports say banks have reduced new credit card issuances this festival season due to rising delinquencies. Reserve Bank of India (RBI) data indicates a 32.6 per cent decline in new card issuances: From 920,000 in August to 620,000 in September. Similarly, personal loan growth slowed to 16.4 per cent in September 2024, down from 18.2 per cent the previous year. 

 

In November 2023, the RBI required banks to allocate more capital for unsecured loans to address the issue of rising delinquency rates.

 

“I believe the next major credit default event in India will likely stem from credit cards and personal loans, unlike 2008 when corporate debt was the issue,” says Vivek Banka, co-founder, GoalTeller, a financial planning app.

 

Tackling the squeeze

 

When credit availability tightens, eligibility criteria become stricter. “You may receive a smaller credit limit, need a higher credit score, and face stricter terms like higher annual percentage rates (APR) and penal charges,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com. 

 

To improve the chances of credit card approval, experts advise maintaining a strong credit score by avoiding over-leverage.

 

On-time payments by setting up an auto electronic clearing service (ECS) mandate and staying within credit limit can help maintain a high score. Shetty advises opting for a secured credit card if one's credit score is not as high as required. It is also a good option for those with limited credit history.

 

Secured credit cards are issued against a fixed deposit (FD). The credit limit is usually 90 per cent of the pledged FD amount. “Secured cards function similarly to regular credit cards, offering benefits such as rewards, discounts, and interest-free periods. They can help individuals build or rebuild their credit scores over time,” says Gaurav Aggarwal, chief business officer, Paisabazaar.

 

“Saving at least 20 per cent of your take-home salary can provide financial security,” says Banka.

 

A common mistake credit card holders commit is choosing credit cards that don’t align with their needs. “People are drawn to cards with high fees for immediate perks or luxury benefits, which often leads to wasted expenses on annual fees. Closing unused cards can help reduce unnecessary charges,” says Banka. 

 

Slowdown in personal loans

 

  In personal loans, too, rising defaults and over-leveraging are prompting lenders to exercise caution. “Regulatory tightening, through higher risk weights and lending sub-limits, has reduced the supply of personal loans,” says Aggarwal.

 

Another factor is misuse of such loans. “Personal loans are increasingly being used for stock market investments, including futures and options – a risky trend. If markets correct, these loans could default,” warns Banka.

 

Borrowers who fall in the high-risk category due to their poor credit history, occupation, or debt levels may struggle to access unsecured loans.

 

Boosting eligibility

 

  According to experts, improving personal loan eligibility involves maintaining a good credit mix and score. “If you have a good mix of secured and unsecured loans, a good credit history and score, you should get a loan at a good rate,” says Shetty.

 

Aggarwal recommends comparing loan offers. “Credit risk evaluation and loan pricing can differ widely depending on the lender, so it’s crucial to compare loan offers,” says Aggarwal.  Checking offers from banks with which there is an existing relationship, like having a savings account or fixed deposit, can improve the chances of getting a personal loan. 

 

“Additionally, file Income Tax returns on time as most lenders require the last one to three years of tax return history. A history of reasonable investments and tax payments further strengthens loan eligibility,” says Banka.

 

In the case of a secured loan, you are given a loan against collateral. In case of default, the lender may attach your collateral.

 

These loans offer higher chances of approval and come with lower interest rates. “A loan against FD would come at a maximum of 2 percentage points over the FD rate. Gold loans are typically 2-4 percentage points lower than vanilla personal loans,” adds Shetty.

 

Loans against securities (LAS) allow investors to leverage existing investments like bonds, shares, exchange-traded funds (ETFs), and mutual funds. “The absence of EMI burden and prepayment charges makes LAS a good option for addressing short-term fund needs and cash flow mismatches without compromising financial goals,” says Aggarwal.

 

Gold loans are usually disbursed on the very day of application. “The sanctioned loan amount depends on the valuation of gold deposited as collateral and the loan-to-value (LTV) ratio set by the lender, subject to the regulatory cap of 75 per cent on LTV ratio set by the RBI,” says Aggarwal. Remember that if the LTV ratio exceeds 75 per cent due to falling gold prices, lenders may require additional gold or cash. Failing to meet this requirement could result in the lender selling the pledged gold.

 

A loan against property (LAP) allows property owners to obtain financing while retaining ownership. “The loan tenure on LAPs usually goes up to 15 years, which allows higher EMI affordability for LAP borrowers vis-à-vis unsecured loan borrowers,” says Aggarwal. However, the disbursal process can take two-three weeks due to complex approval procedures.

 

Finally, when considering secured loans, proper research is essential. Interest rates and other terms and conditions should be carefully reviewed. The fine print could also reveal high penalties and fees. 

Criteria for obtaining a loan against property

 

The applicant must own the property offered as collateral

 

The title should be clear and free from legal disputes or encumbrances

 

Salaried individuals typically get loans for up to 60 years, while self-employed individuals may get them for up to 65 years

 

Lenders assess the applicant’s income, employment status, and repayment capacity; applicants may need to provide salary slips, bank statements, etc.

 

A good credit score, usually above 650, is crucial for approval and to get a better interest rate