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What is a bad credit personal loan?
A bad credit personal loan is a loan that’s designed for borrowers who have a low credit score. This is usually because the borrower has defaults or other negative information on their credit report. The loan can be used for a range of purposes, including debt consolidation, paying for a holiday or financing a home renovation.
How do bad credit personal loans work?
In many respects, bad credit loans work in the same way as other personal loans. You borrow a fixed amount of money for a fixed term (duration) and repay it in weekly, fortnightly or monthly instalments, plus interest and fees.
The key difference is that bad credit personal loans are riskier for lenders. Because of this, borrowers can generally expect to pay higher interest rates and fees, and may be limited in how much they can borrow.
How are bad credit personal loans different?
| Standard personal loan | Bad credit personal loan | |
|---|---|---|
Loan amounts | Up to $100,000 | Up to $30,000 (but varies by lender) |
Interest rates | Starting from around 6% | Starting from around 9% |
Available from | Major banks, credit unions and online lenders | Specialist bad credit lenders |
Proof of income & expenses required | Usually 3 months | Up to 6 months |
The average bad credit personal loan amount is $20,659, according to Money.com.au’s analysis of thousands of loan requests. This is higher than the overall personal loan average of $17,493.
What are the interest rates on bad credit personal loans?
The average interest rate for loans with bad credit (0-459 credit score) is 25.25% p.a. That’s according to personal loan statistics compiled by Money.com.au’s recent analysis based on real quotes provided to borrowers. The average rate for borrowers with a credit score between 460 and 660 is 20.07% p.a.
But remember, your interest rate will be tailored to you and some bad credit borrowers may qualify for a lower rate. For example, if you pay a deposit towards your finance or have a guarantor, you may be able to secure a lower rate.
Here’s what you need to do to find the best bad credit personal loan:
- Pay close attention to the loan’s comparison rate as this factors in how fees impact the overall cost of the loan.
- Use a personal loan calculator to work out the cost of different loan options based on the interest rate and fees.
When comparing bad credit personal loans, the comparison rate estimates the overall cost of the loan per year, including both interest and fees.
Compare bad credit personal loan rates & repayments
| Loan amount | Weekly repayment (10% interest) | Weekly repayment (20% interest) | Weekly repayment (30% interest) |
|---|---|---|---|
$5,000 | $25 | $31 | $37 |
$10,000 | $49 | $61 | $75 |
$15,000 | $74 | $92 | $112 |
$20,000 | $98 | $122 | $149 |
$25,000 | $123 | $153 | $187 |
$30,000 | $147 | $183 | $224 |
Are you eligible for a bad credit personal loan?
First, you’ll want to check you meet the basic criteria for applying. You must be:
- Over the age of 18
- An Australian citizen or permanent resident
- Employed or have another regular source of income
- Not currently bankrupt or under a Part IX debt agreement (a legally binding contract between you and your creditors)
Lenders will consider:
- Your income
- How long you've been in your current address (longer is better)
- The amount you’re borrowing
- The term of the loan
- How long you’ve been in your current job for (longer is better)
- Your other expenses and debts (e.g. energy bills, credit cards)
- Whether you have dependents
- The purpose of the loan
- Your credit history
What do lenders look for on your credit history?
1
The type of default(s) listed on your credit file
Not all credit defaults are viewed the same. Non-financial defaults (i.e. a phone bill) are generally less of an issue for bad credit personal loan providers. Financial defaults (e.g. a missed loan or credit card payment) are more serious. A default can stay on your credit report for up to five years, according to Equifax.
2
Paid vs unpaid defaults
A specialist lender will consider whether any defaults have now been repaid. Paid defaults are less of an issue. They may also consider whether you’re making progress towards repaying any defaults that are still outstanding.
3
How current the information on your credit file is
Specialist bad credit lenders will factor in the age of the information on your credit file. For example, they may still consider your application if you were discharged from a debt agreement more than 12 months ago.
4
The current picture
Your credit history is based on, well, history. If your overall financial position has improved in the meantime and you’re in stable employment, a bad credit lender will weigh this up against any negatives from the past.
Secured vs unsecured bad credit personal loans
Secured bad credit personal loans
You offer up an asset to secure the loan (e.g. a car). The lender can sell the asset to recoup its costs if you don’t repay the loan. It may be easier to be approved because there’s less risk for the lender. Interest rates are generally lower on secured personal loans for the same reason.
Unsecured bad credit personal loans
With an unsecured personal loan you don’t put up an asset as security. The lender cannot sell an asset to get its money back if you default. The approval process may be stricter because the lender is taking on more risk. Expect to pay a higher interest rate if you’re approved.
8 must-read tips for bad credit loan approvals
1
Check your credit score before you apply so you know if you’re in a good position to be approved. Knowing your credit score can also help you negotiate a better deal, according to Moneysmart. You can also request a free copy of your credit report from one of Australia’s main credit bureaus (Equifax, illion or Experian) every three months.
2
Look at your budget (your income and expenses) and work out how much you can afford to make in regular loan repayments.
3
Based on that, calculate what you can afford to borrow in total.
4
Put your repayment amount into a savings account for 6-8 weeks before applying. This will prove to the lender that you’ll be able to afford the repayments.
5
Make sure your last six months worth of bank statements look good. Regular dishonours, missed payments or gambling transactions could be red flags.
6
If you’ve just started a new job or changed address, it may be best to wait until you’ve been there for six months before applying. Lenders like to see stability.
7
Consider asking someone you trust if they will act as a guarantor for the loan. The guarantor agrees to be responsible for the loan if you cannot meet the repayments.
8
Lastly, consider carefully if now is a good time to take on debt. It may be better to wait until your financial situation and credit score have improved.
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