Having a bad credit history is never good – but it doesn’t mean you can’t successfully apply for personal loans.
You may find it harder to be approved for a personal loan with bad credit than someone with a better credit history. You may also have to pay a higher interest rate or higher fees for a bad credit personal loan. However, there are several lenders who are willing to consider personal loan applications from people with bad credit histories.
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 for your situation.
To help you work out which bad credit personal loans may be best for you, it’s important to understand the basics of personal loans in general, bad credit personal loans in particular, as well as debt consolidation, credit ratings/scores and comprehensive credit reporting (CCR).
What is a personal loan?
A personal loan involves borrowing money from a lender for some personal purpose, such as paying for a wedding, a holiday or home renovations. Personal loans generally start from a minimum of $2000 and can be paid back over a term from 12 months to 10 years by making regular scheduled repayments, similarly to a mortgage or home loan.
Personal loans may be secured or unsecured. Secured personal loans guarantee the amount you’re borrowing with the value of an asset, such as a car or equity in your home. This can help reduce a lender’s risk, meaning you may pay a lower interest rate, even if you have bad credit.
Unsecured personal loans don’t require security, and are available to borrowers who don’t have a suitable security asset available, or who aren’t willing to risk losing it if they default on their repayments. However, unsecured personal loans are more likely to have higher interest rates.
Much like home loans, personal loans are available with fixed interest rates (which remain the same for the full loan term) or variable interest rates (which the lender may increase or decrease). Generally, variable rate personal loans are more likely to offer features and flexibility, while fixed rate personal loans keep your repayments consistent, making your budgeting that little bit simpler.
What is a credit score?
Everyone in Australia who borrows money has a credit score, also known as a credit rating. Credit reporting agencies calculate this number based on your credit history – the better your history, the higher your credit score.
Banks and other lenders use credit scores to estimate the level of risk involved when assessing applications to borrow money, such as when you apply for a personal loan, home loan or credit card.
How are credit scores used?
If you have a high credit score, lenders will consider you a low-risk borrower. Good credit borrowers are more likely to see their credit applications approved, and/or to receive lower interest rates and fees.
If you have a low credit score, lenders will consider you a high-risk borrower. Bad credit borrowers are more likely to pay higher interest rates on their loans, or see their credit applications denied altogether.
What is a bad credit score?
Credit scores are often calculated out of 1000 or 1200. Bad credit scores are typically at the lower third of this scale, with average credit scores in the middle third, and good credit scores in the top third.
Different credit reporting agencies use different criteria to assess credit histories and generate credit scores. For example, here’s how Equifax rates credit scores:
- EXCELLENT – 833-1200
- VERY GOOD – 726-832
- GOOD – 622-725
- AVERAGE – 510-621
- BELOW AVERAGE – 0-509
According to Equifax, borrowers are more likely to experience adverse financial events (e.g. a default, bankruptcy or court judgment) if their credit score is Below Average, though Average credit borrows are also likely to experience adverse events.
Can I get a personal loan with bad credit?
It’s not as easy to get a personal loan with bad credit as it is to get a personal loan with good or excellent credit, especially if you’re only looking at personal loans from the major banks. However, it is still possible. Some lenders specialise in providing personal loans for borrowers with bad credit histories.
Bad credit personal loans are more likely to have higher interest rates and fees than typical personal loans. Bad credit borrowers may also need to provide additional security to guarantee a bad credit personal loan, such as the value of their car, or equity in their home.
How did I get a bad credit score?
Negative events in your credit history can lead to a bad credit score, including but not limited to:
- Missing/defaulting on loan repayments (including credit cards)
- Going bankrupt
- Having credit applications denied
- Having too many credit checks conducted over a short period of time (most lenders will conduct a credit check each time you apply for credit)
How can I improve my credit score?
In the past, credit scores were calculated using only negative credit events. However, the introduction of Comprehensive Credit Reporting (CCR) means that maintaining a positive credit history may help you repair a bad credit score over time.
Positive credit events that may help improve your credit score include (but aren’t limited to):
- Keeping up with your loan repayments
- Fully repaying loans
- Keeping the size of your debts manageable
Are there bad credit personal loans with no credit checks?
Some small loan providers, including payday lenders, offer quick loans with no credit checks, which may help avoid worsening a bad credit score. However, this does not mean your personal loan has guaranteed approval.
Under Australian law, responsible lenders must:
- Make reasonable inquiries about your financial situation, requirements and objectives
- Take reasonable steps to verify your financial situation
- Decide whether the credit contract you are asking for is ‘not unsuitable’ for you
Even if a loan has no credit checks, the lender will still need to assess your application based on your current ability to repay the loan. For example, some lenders will decline loan applications to borrowers whose income comes mainly from Centrelink benefits, and/or borrowers who already have outstanding loans owing.
Can I get a payday loan with bad credit?
Payday loans (for amounts up to $2000) and medium amount loans (for amounts from $2001 to $5000) may be an option for selected bad credit borrowers. It’s important to compare your options and calculate whether you can afford a payday loan’s repayments before making your application, as payday loans often have very high interest rates and fees.
It’s often best to only take out payday loans to manage financial emergencies, and then only if you’re very confident you can afford the repayments.
How can I get a personal loan for bad credit?
- Check your credit score for free – this can help you get a better idea of what personal loan options you may be eligible for
- Gather your documents – your personal loan application may require you to show proof of identity and residence, as well as details of your current income and liabilities (e.g. credit cards, other loans you have owing), as well as details of any security that may be required
- Compare personal loans – consider using a personal loans calculator to estimate the loan size, term length and interest rate you can afford
- Contact the lender – before you fill out any application forms, try to get in touch with the lender to find out if they lend to borrowers with bad credit
- Make your application – fill out the required forms, providing all the necessary information
Can I use a bad credit personal loan for debt consolidation?
If you are struggling to repay multiple debts, such as personal loans, car loans and credit cards, one option may be to combine these into one by using a debt consolidation personal loan. Rather than making multiple repayments each month, and being charged interest on each debt separately, you’ll just need to make the one repayment on the personal loan instead. Not only can this help to simplify your household budgeting, but because you’ll only be charged interest once, you may pay less from month to month than managing your smaller debts separately.
Before you apply for a debt consolidation personal loan, calculate whether you’ll be able to afford the new loan’s repayments, and how much you’ll be paying in total over the loan’s full term. The longer your loan term, the more payments you’ll need to make, and the more times you’ll be charged interest on what you owe – this could end up costing you more in total than clearing your debts separately, even if you’re paying a lower interest rate.
If you have bad credit, you may find it more difficult to successfully apply for a bad credit personal loan for debt consolidation. When you’re comparing debt consolidation personal loans, be sure to check the terms and conditions involved, such as any limits on the size or type of debt that can be consolidated, or any income restrictions the lender may have.
It’s also important to remember that once you’ve consolidated your existing debts, you should avoid borrowing more money if possible. For example, once you’ve transferred the outstanding debt from your credit cards to a personal loan, going on a fresh credit card spending spree and building up all-new debt could risk putting you in serious financial trouble.
Where can I get more help?
If you have bad credit, are having trouble applying for personal loans with bad credit, and find yourself in a difficult financial situation, help is available. Free financial counselling is available, and you can also call the national debt hotline on 1800 007 007.