In India, 70% of adults either don’t have a profile on credit bureaus or have almost negligible files. Formal salaried employment makes up just a quarter of all jobs in the country. Yet, the eligibility criteria for a bureau profile are having a bank or NBFC loan or a credit card history. These in turn typically require a bureau profile and/or a salaried job with a company of a certain vintage and size, often making it a circular reference.
Yet, access to credit is a crucial part of our financial well-being. Many people struggle to secure traditional loans due to low or no credit scores. A solution to this problem lies in secured loans. These loans offer an opportunity for individuals who may not have demonstrated credit worthiness in the past. In this blog, we will explore secured loans against life insurance policies and how they help widen credit access for those who need it most.
Introduction to Secured Loans Against Life Insurance and Others Options
Secured loans are those that require the borrower to offer collateral, such as a home, car, gold, or in the case of life insurance policies, the policy’s cash value. Unlike unsecured loans, which depend primarily on the borrower’s credit score and financial history, secured loans use an asset as security for the lender. This makes them more accessible for individuals who may not have built a robust credit profile yet. Life insurance policies, which accumulate a cash value over time, are a strong demonstration of their ability and willingness to pay over time, and are thus increasingly being used as collateral for loans.
In addition to providing access to funds, loans against life insurance policies are attractive due to their lower interest rates compared to informal lending options, or other high-interest personal loans.
Understanding Credit Scores and What’s a Zero Credit Score Loan
A credit score is a measure of your willingness and ability to repay a loan. It reflects how reliably you've managed credit in the past, based on factors such as your payment history, outstanding debt, and the length of your credit history. Lenders use your credit score to assess the risk of lending you money. A higher credit score indicates that you're more likely to repay the loan as agreed, while a lower score may signal potential challenges in repayment. This helps lenders determine not only whether you qualify for a loan, but also what terms, including interest rates, you'll be offered.
Here’s a broad indication of the key factors that go into calculating credit scores, and their relative weights:
- Payment History (35%): This is the most significant factor. Missed or delayed payments on loans and credit cards can negatively impact your score.
- Credit Utilization (30%): This measures how much of your available credit you’re using. Lower utilization rates generally indicate better financial management.
- Length of Credit History (15%): A longer credit history can positively impact your score, as it gives lenders more data on your borrowing habits.
- Credit Mix (10%): A healthy mix of credit types (e.g., credit cards, personal loans, and secured loans) boosts your score.
- New Credit Inquiries (10%): Multiple recent inquiries for credit can temporarily lower your score.
For many, particularly first-time borrowers, a lack of payment and no length of credit history can make it difficult to access traditional loans. However, secured loans provide a pathway to bridge this gap.
That being the case, secured loans against life insurance is a great choice, as it has several other benefits, besides being low-risk secured loans.
Limited Impact of Credit Score on Secure Loans, including Loans against Life Insurance
While credit scores play a critical role in the approval process for unsecured loans, they have a limited impact on secured loans, particularly those backed by life insurance policies. The key distinction lies in the collateral. When a borrower is using life insurance for loans, the lender’s primary concern shifts from the borrower’s creditworthiness to the value of the collateral.
A thin credit file on bureau or no credit score doesn’t automatically disqualify someone from obtaining a secured loan. Instead, what matters more is the cash value of the life insurance policy, and the fact that the policy is in force - a demonstration of past on time payments by the policyholder. The lender will typically offer a loan that is a percentage of the accumulated cash value, ensuring that their risk is minimized.
However, it’s important to note that while a low credit score may not be an outright barrier, a negative listing (such as a history of defaults or bankruptcy) can still influence the lender’s decision. That said, borrowers who make prompt repayments on these secured loans can build or rebuild their credit profile over time, positively impacting future credit access through life insurance.
Tips for Improving Credit Scores
Even though secured loans offer a pathway for individuals with low or no credit scores to access funds, it's important to focus on improving credit scores to enhance future financial opportunities. Here are some practical tips:
- Timely Payments: The most crucial factor in improving a credit score is paying bills on time. Setting up reminders or automatic payments can help ensure that payments are never missed.
- Reducing Credit Utilization: Lowering the balance on credit cards helps improve the credit utilization ratio, which in turn boosts the credit score.
- Avoiding New Credit Applications: Each new credit inquiry can slightly lower a credit score. Applying for new credit only when necessary is a good strategy for maintaining a strong score.
- Diversifying Credit: A diverse mix of credit types, such as credit cards, auto loans, and mortgages, can positively impact a credit score.
Secured loans against life insurance policies can also help improve credit scores over time. By making consistent, on-time payments, borrowers can demonstrate responsible credit usage, which could eventually lead to better access to unsecured credit products and more favourable terms.
Mera Kal: A Better Way to Access Loan Secured by Life Insurance Policy
At Mera Kal, we specialize in providing loans against life insurance policies, offering a valuable option for those looking to unlock funds without giving up the benefits of their policies. Our process is simple, fast, and transparent, ensuring that you can access the funds you need while keeping your financial future intact.
Here’s how it works:
- Eligibility Check: We assess your life insurance policy’s accumulated cash value to determine the loan amount you are eligible for. You can check your loan eligibility through our loan eligibility calculator.
- Loan Disbursement: Once the loan terms are agreed upon, we disburse the funds directly to you. This loan is typically processed faster than traditional loans.
- Repayment: You make regular repayments on the loan, which helps rebuild or maintain your credit score, ensuring better access to future financial products.
Mera Kal’s loans against life insurance policies offer a low-interest alternative to informal lending while retaining the value of your policy. With flexible terms and a simple process, we are committed to making financial support accessible to everyone, regardless of their credit history. Mera Kal is your answer to the question - how to use life insurance for a loan.