Having a bad credit history is never good – but it doesn’t mean you can’t qualify for personal loans.
Sure, you’ll find it harder than someone with a better credit history. You’d also have to pay a higher interest rate. However, there are several dozen lenders who are willing to consider applications from people with bad credit histories.
This guide will explain the ins and outs of personal loans in general and bad credit personal loans in particular.
It will also explain debt consolidation, credit ratings/scores and comprehensive credit reporting.
Each person’s financial circumstances are unique, so while bad credit personal loans will be suitable for some people, they won’t be suitable for others. The key is to do your research so you can make the best possible decisions.
A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan – however, the process is easier and faster than taking out a mortgage. Loan sizes usually range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.
It’s unusual for a lender to make a personal loan above $100,000, although there is no formal limit. As with all lending products, each lender sets its own policies, while each borrower is assessed on a case-by-case basis.
Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.
For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.
For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent. (Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions – although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.)
The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.
One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.
Some lenders are able to approve applications over the internet and within minutes. However, there is a catch. People who take out easy/instant loans generally pay higher interest rates and are restricted to lower amounts than people who follow a traditional borrowing process.
It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments. Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan.
Personal lenders are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.
A bad credit personal loan is a personal loan designed for somebody with a bad credit history. They have higher interest rates than regular personal loans and are also harder to access.
In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts in such a way that it makes it easier for them to repay those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate.
However, this strategy can backfire if the borrower spends the extra money instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.
Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans – they also get loaned less money. Each lender has its own policies, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.
In the best-case scenario, an application for a bad credit personal loan can be made within minutes and then be approved within 24 hours.
You can get a bad credit personal loan by applying directly to a lender, by going through a mortgage broker or by using a comparison website like RateCity.
No. Bad credit personal loans are harder to access than regular personal loans, so lenders will want time to study your application.
A bad credit personal loan is ‘secured’ when the borrower offers up an asset (such as a car or jewellery) as collateral or security. The lender can then seize the asset if the borrower fails to repay the loan.
A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset (such as a car or jewellery) as collateral or security. Lenders charge higher interest rates on unsecured loans than secured loans.
Several dozen lenders offer bad credit personal loans. These are generally smaller lenders that aren’t household names.
Debt consolidation is the process of rolling several old debts into one new debt – usually to save money or for the sake of convenience.
In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay a (different) $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 15 per cent.
However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.
The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.
However, people with bad credit histories can make debt consolidation work by following this three-step process. First, find a lender willing to give you a bad credit personal loan – this process will be simplified if you go through a mortgage broker or use a comparison website like RateCity. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced. Third, instead of spending those savings, use them to repay the new loan.
A person is deemed to have ‘bad credit’ when they have a poor history of repaying debts.
Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.
Bad credit history is caused by filing for bankruptcy, defaulting on your debts, falling behind on your repayments and having loan applications rejected. Lenders are wary of borrowers who demonstrate this sort of behaviour, because it suggests they might struggle to repay future loans.
You can find out what your credit history is like by accessing what’s known as your credit rating or credit score.
Your credit rating/score is a number that summarises how credit-worthy you are based on your credit history.
The lower your score, the more likely you are to be denied a loan or forced to pay a higher interest rate.
Credit ratings/scores are calculated by credit reporting bodies such as Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service. These are separate organisations, so they use different systems.
Equifax gives scores between 0 and 1,200:
Dun & Bradstreet (through the Credit Simple service) gives scores between 0 and 1,000:
Experian gives scores between 0 and 999:
The Tasmanian Collection Service doesn’t give scores. Instead, it prepares credit reports for credit providers and then lets those providers make their own assessment.
Failing to repay loans and bills will damage your credit score. So will falling behind on your repayments. Your credit score will also suffer if you apply for credit too often or have credit applications rejected.
Different credit reporting bodies use different formulas to calculate credit scores. However, they use the same type of information – credit history and demographic profile.
So they’re going to look at how many credit applications you’ve made, who they were with, what they were for, how much they were for and your repayment record. They’ll also look at your age and postcode. They’ll also look to see if you’ve had any bankruptcies or other relevant legal judgements against you.
Your score can change if your demographic profile changes or new information is added to your file (such as a new loan application) or existing information is removed from your file (because it has reached its expiry date).
Credit ratings/scores are calculated by credit reporting bodies. The main bodies are Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service.
Credit reporting bodies like Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service will give you a free credit report once a year. You can also get a free report if you’ve been refused credit in the past 90 days.
Credit reporting bodies have up to 10 days to provide reports. If you want to access your report quickly, you’ll probably have to pay.
Your credit score will improve if you demonstrate that you’ve become more credit-worthy. You can do that by minimising credit applications, clearing up defaults and paying bills on time.
Another tip is to get the one free credit report you’re entitled to each year – that way, you’ll be able to identify and fix any errors.
If you want to fix an error, the first thing you should do is speak with the credit reporting body, which make take of the problem or contact credit providers on your behalf.
The next step would be to contact your credit provider. If that doesn’t work, you can refer the matter to the credit provider’s independent dispute resolution scheme, which would be either the Financial Ombudsman Service or the Credit and Investments Ombudsman.
If that doesn’t work, your final options are to contact the Privacy Commissioner and then the Office of the Information Commissioner.
A credit report is a record of your credit history – your credit enquiries, borrowings and your repayments. The report will include information about any bankruptcies or other relevant legal judgements. It will also include biographical information such as your address, date of birth, driver’s licence number and employment history.
Click here to view a dummy Equifax credit report.
Comprehensive credit reporting means including both positive and negative information on a person’s credit file. Before comprehensive credit reporting was introduced, only negative information was included.
Comprehensive credit reporting was introduced to make credit reports fairer and more accurate. Under the previous system, credit providers only saw negative information about potential borrowers. Now, they get to see both positive and negative information, which means that credit providers can see if a borrower’s negative credit behaviour is typical or a one-off.
^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.