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In addition to interest rates, review the fine print for penalties and repayment terms, and select a reputable lender to avoid harsh recovery practices.
Credit cards and personal loans are becoming harder to obtain with banks tightening access to new credit cards and personal loans amid rising delinquencies.
Data from the Reserve Bank of India shows a 32.6 per cent decline in new card issuances -- from 920,000 in August to 620,000 in September.
Growth in personal loans has also slowed, with a year-on-year rise of 16.4 per cent in September 2024, down from 18.2 per cent the previous year, according to the central bank.
Stricter eligibility criteria
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, CEO, BankBazaar.com.
Certain customers may face more challenges in securing cards.
"Young professionals or those just entering the workforce, who are new to credit, may find it harder to secure a credit card with a decent limit," says Vivek Banka, co-founder, GoalTeller, a financial planning app.
Navigating the credit squeeze
For individuals with limited credit history or lower scores, Shetty suggests using a secured credit card.
Secured cards, which are issued against a fixed deposit, typically have credit limits of around 90 per cent of the FD amount.
"Secured cards operate much like traditional credit cards. They serve as an effective tool for individuals aiming to build or repair their credit scores gradually," says Gaurav Aggarwal, chief business officer, Paisabazaar.
A high credit score improves the chances of a credit card application getting approved.
"Set up auto ECS (Electronic Clearing Service) mandates so that you don't miss out on payments of EMIs," says Banka.
"Pay the full amount due on your credit card before the due date and don't use it as a long-term financing tool to extend your budget," adds Banka.
Avoid over-leveraging. "Keep your credit utilisation ratio low. And do not apply indiscriminately for loans or credit cards," says Shetty.
Select cards that match your personal needs.
"People are drawn to cards with high fees for immediate perks or luxury benefits, which often leads to wasted expenses on annual fees," says Banka.
"Closing unused cards can help reduce unnecessary charges and curb excessive spending by limiting available credit," explains Banka.
Slowdown in personal loans
Rising defaults and over-leveraging are also impacting access to personal loans.
"Regulatory tightening, through higher risk weights and lending sub-limits, has reduced the supply of personal loans," says Aggarwal.
Lenders are concerned about the misuse of these 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 considered high-risk due to factors such as poor credit history; poor occupation, income, or employer profile; and high indebtedness may face difficulties in obtaining loans, informs Aggarwal.
Shetty adds that individuals with multiple loans and low credit scores may also struggle to qualify.
Improving eligibility
Customers should first check offers from lenders with whom they have an existing relationship, as they stand a better chance of getting a personal loan from them.
Then compare offers on an online financial portal.
"Credit risk evaluation and loan pricing differ widely from one lender to another," says Aggarwal.
Banka advises timely income tax filing, as lenders typically check the past one to three years of returns. Shetty suggests maintaining a balanced credit mix of secured and unsecured loans.
Go for secured loans
Secured loans, backed by collateral, come with higher chances of approval and lower interest rates.
"A loan against FD would come at a maximum of 2 percentage points over the FD rate. Gold loans typically charge 2 to 4 percentage points lower than personal loans," says Shetty.
Loan against securities (LAS) allows borrowers to leverage investments such as bonds, shares, exchange-traded funds, and mutual funds. These loans are typically offered as overdrafts with sanctioned credit limits.
Interest is charged only on the amount drawn. Only the interest must be paid each month.
"The absence of EMI burden and prepayment charges makes LAS a good option for addressing short-term cash flow mismatches," says Aggarwal.
Gold loans, often disbursed on the same day, have tenures of 1 to 3 years (up to five years with certain lenders).
"The sanctioned loan amount depends on the valuation of gold deposited and the lender's loan-to-value (LTV) ratio, subject to the regulatory cap of 75 per cent set by RBI," says Aggarwal.
Repayment options include EMI, bullet payment, and interest-only during the tenure and principal at the end.
Loans against property (LAP) let property owners access financing while retaining ownership.
"The loan tenure on LAPs usually goes up to 15 years, which makes the EMI more affordable," says Aggarwal.
However, disbursal may take two to three weeks, prepayment can be challenging, and retrieving property documents from the lender might require some effort.
"If the value of the movable asset falls, the lender asks for additional margin. The value of an immovable property usually fluctuates less," says Banka.
Finally, note that defaulting on a secured loan allows the lender to seize the collateral.
In addition to interest rates, review the fine print for penalties and repayment terms, and select a reputable lender to avoid harsh recovery practices.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Himali Patel is a Mumbai-based independent financial journalist
Feature Presentation: Ashish Narsale/Rediff.com
