One of the most popular types of loan procured by customers in the Philippines are personal loans. This is because unlike auto loans or home loans, personal loans can be utilized for a variety of needs. There is no restriction as such on the purpose and can be used to finance needs such as credit card bills, hospital bills, vacation, home/office renovation and such. Personal loans are versatile and hence highly sought after. There are many banks and financial institutions within the Philippines that provide Personal loans at predetermined rates of interest. The main concern for those availing loans is if the amount of finance provided is adequate or not. However, a majority of banks provide an adequate quantum of loan amount and at economical rates of interest.
Types of Personal Loans
Most banks and financial institutions require customers to provide an additional collateral as security while procuring loans. Based on this requirement, personal loans can be classified. There are two main types of personal loans. They are secured loans and unsecured loans. Secured loans are personal loans that require customers to provide an additional collateral while procuring loans. These assets are dependent on the loan quantum. Sometimes a co-signer on the loan is also required. However certain banks and financial institutions also provide personal loans without the requirement of an additional co-signer or collateral. These loans are provided solely based on the customer’s credit history, ability to repay and their income. Such personal loans also tend to have a higher rate of interest attached to them and these loans are known as unsecured loans. Most personal loans tend to be unsecured in nature, thus reducing the risk of customers in losing their assets in case they are unable to repay their loans.
The primary criteria most banks look for in potential customers is the ability to repay the loan. Customers provide loans more readily to those who present a low risk in terms of loan repayment and these customers also procure loans at a more economical interest rate. Therefore customers who have a favourable credit history stand a greater chance of procuring personal loans more easily and at a rate of interest convenient to them. In addition to this, most banks also have a minimum requirement in terms of income that the customer will have to possess before being eligible to avail a personal loan, this is because the income of the person determines his/her loan repayment ability as well.
As mentioned before, customers with a good credit history have an easier time procuring loans. Good credit history indicates that the person has a good chance of repaying the loan without difficulties and that he/she is financially stable. Most banks also have a certain criteria or limit imposed based on the customer’s credit report. In case the customer’s credit history does not adhere to the bank’s expectations then the bank may not approve the loan or even if the loan is approved then the rate of interest charged will be very high.
Therefore customers with a bad credit history will find it difficult to avail loans of their choice. Unfavourable credit can be due to a variety of reasons such as unpaid and overdue credit card bills, cancelled cards, default on loans, bounced cheques, bankruptcy and so on. A bad credit is an indicator to banks that the customer may not be able to repay his/her loan along with the interest rate.
Importance of knowing one’s credit history
It has been observed that most customers are unaware of the fact that they may even have bad credit. This is because they would have unknowingly indulged in financial activities that would have harmed their credit score, for example - ABC had decided to close some of his credit card accounts as he no longer used them but he did not realise that doing so, the available credit in that card would disappear thus increasing the ratio of debt - available credit. Other ways in which a person may have unknowingly ruined his/her credit would be increasing their credit spends very quickly, paying all of the credit card debt as doing so would ensure that it is a part of the credit history and this history is not as valuable as payment history is. Assumptions such as paying their bills in collections would be beneficial is actually harming their credit history. Therefore, unawareness about the factors impacting a person’s credit history does more harm than good, and the first step that customers need to take before applying for loans is checking their history, credit record and credit score.
Credit history is the individual’s usage of credit over time and other information such as debt repayment schedule and so on. This history is provided by banks, the government, collection agents and others. Credit History, when consolidated and summarized is a person’s Credit record which is one of the primary documents used by banks and lenders before deciding a person’s eligibility in procuring loans or credit cards. A numeric representation of this summary is then called a Credit score. This score is calculated using a complex formula and is generally not provided for free unlike credit records. Although as of now Philippines does not have a centralised credit report agency, other external databases do provide this information such as Bankers Association of the Philippines Credit Bureau and TransUnion.
Although it is difficult for those who have bad credit records to avail loans, it is not impossible. One of the common loans that customers avail when they have bad credit is payday loans or short term loans that are usually repaid with their next salary. However, such loans often come with a high interest rate. Similarly, even if banks provide loans to those with unfavourable credit, then the rate of interest charged will be high and there might be additional conditions imposed and the requirement of a collateral. Therefore, the best option is to increase the credit history and this is done over time.
Steps to receive loans even with bad credit
Customers who have a bad credit history can either opt for payday loans which are short term loans with a high rate of interest or borrow from family or friends. If none of these work then the below options can be considered.
- Check credit records - Customers can procure their records from agencies or banks for free and this is the first step that is to be taken. This is because, sometimes credit reports have discrepancies and errors that may be affecting the record significantly. Checking their credit reports can help customers correct these errors and thereby have a report that is more favourable.
- Opting for a loan from the bank that they frequently work with- Instead of approaching private lenders or companies for personal loans, customers should first try to procure their loan from the bank they frequently work with. Banks usually have a record of all the financial activities of that person such as the average daily balance, deposits and so on. All this information would determine whether a customer can procure a loan or not.
- Having a co-signer or someone file for the loan on their behalf - Customers with an favourable credit can perhaps ask their relatives or friends to co-sign the loan with them. This would increase the chances of banks and lenders providing loans a lot more easily and at a better interest rate. If not, customers can also ask a trusted relative or friend who has a good credit to apply for the loan on their behalf. The payments are to be made by the customers themselves. It is to be noted that in case customers fall back on the loans or are unable to pay then the loan will have to be repaid by the co-signees or the person who applied on behalf of the customer, therefore customers have to ensure that they repay the loan on time along with the interest rate.
- Ensure that the bank or lender applies for a soft enquiry - Customers need to ensure that the lender is pulling a soft enquiry as hard enquiries can affect the person’s credit score. Also if the other lenders see hard enquiries on a customer’s credit report without a trade line linked to that company then it would be assumed that the loan application was rejected.
- Apply for loan restructuring program - Although this option is not available frequently, customers can try applying for this program through which they can pay for the loan at a lower amortization but same interest rate.
- Online private lenders can be considered by customers while procuring loans. Customers can discuss the terms with online lenders including tenure and rate of interest and procure a loan. However, customers must exercise extreme caution as there are high chances of customers encountering scammers.
- Collateral loan - Customers, as a last resort can apply for loans which require a collateral or asset. Although this option will have a reduced interest rate, it is risky for the customer as he/she will lose the collateral if the loan is not repaid on time.
How can customers avoid a bad credit history ?
Customers can ensure a good credit record by following some of the simple steps mentioned below-
- Paying their credit card bills on time is the simplest and most significant ways for customers to ensure good credit.
- Customers should ensure that they do not utilize almost or all of the balance on their credit card as this can reduce their score.
- Rather than just paying the minimum amount every month, individuals must ensure that they try to pay their credit card bills in full all the time.
- Cancelling unused cards also helps to prevent debts from accumulating. This should be done after paying all the bills rather than allowing the banks to cancel the card due to unpaid bills
- Customers must also notify credit providers of the change in address or phone number at the earliest as missing significant notifications from credit card companies such as due date notifications and such might lead to bad credit.
Personal loans are one of the most commonly sought after loans and this is due to the fact that these loans are versatile. However, having a bad credit would hinder the process of availing a loan. Philippines also has a lending system which is quite underdeveloped as compared to other countries within Asia. Banks use a centralised system of banking known as credit mapping or C-map through which they are able to identify all customers with bad credit records.
However, procuring loans with bad credit is not impossible, by following the above tips customers can avail the same. However, users must also ensure that they work towards changing their credit record to one that is favourable.