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.
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.
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.
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.
While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, with higher interest rates.
Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will guarantee the loan, taking on the financial responsibility if the borrower defaults.
Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application.
It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit, because there’s a higher likelihood that the personal loan will be repaid.
So a borrower with good credit is more likely to have a loan approved and to get that approval faster, while a borrower with bad credit is less likely to have a loan approved and to get that approval slower.
Many personal loans, much like home loans, can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.
If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.
Many lenders offer online applications for personal loans, which can be convenient for borrowers who don’t have a lot of free time. If you’re not confident your personal loan application will be approved, you may want to consider contacting the lender by email, live chat, phone, or by visiting a branch, to discuss your situation before applying.
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.
The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:
There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.
