Can I get a personal loan with bad credit?

A bad credit score can make it tough to get a personal loan, as lenders may view you as a ‘risky’ borrower. But don’t lose heart. Your credit score isn’t the only factor that lenders consider when deciding whether to approve you for a personal loan. 

Some lenders are willing to provide personal loans for people with bad credit scores as long as they feel sure you’re able to make repayments regularly without falling into financial difficulty. 

Plenti can tailor a personal loan solution to suit your circumstances, including competitive rates and flexible features, even without a good credit score.

Let’s look at what defines a bad credit score and the steps you can take to improve it. 

What is a credit score?

When you apply for a personal loan, you can expect the lender to check your credit history, current debt and income so they feel confident you can repay the loan. 

Your credit score is a number that sums up the information on your credit report. It tells the lender whether or not you are a trustworthy borrower. 

Around 50 major Australian lenders, including Plenti, use ‘comprehensive credit reporting’. This means both negative and positive information is included in your report, painting a clearer picture of your credit history. 

This is a good thing. It means you’re less likely to be held back by one or two negative slip-ups from the past because the lenders will see a more balanced story of your borrowing history, including all the times you DID make payments on time!

Comprehensive credit reporting is mandatory for all lenders by 1 July, 2021.

What is a bad credit score?

A bad credit score can make it hard to obtain a personal loan with a competitive interest rate and may also limit the amount you can borrow. 

A typical credit score will fall between zero and either 1000 or 1200, depending on the credit reporting agency. The higher the score, the better! 

According to this credit score table from credit bureau Equifax, a bad credit score ranges from 0 – 509. A score within this range places you in the bottom 20% of Equifax’s credit-active population.  

• Excellent: 833 – 1,200
• Very good: 726 – 832
  
• Good: 622 – 725
  
• Average: 510 – 621
  
• Below average to average: 0 – 509
  

If you’re a young student, just beginning your first full-time job, or returning from a long stint overseas, chances are you have limited or no credit history at all. In this case, it’s worth taking the time to build up a positive score so that you can more easily borrow money in the future. 

Simply by paying your bills on time, such as mobile phone plans and electricity, you will start to build a positive financial report. Think about setting up direct debit payments for these bills so that you always pay on time. 

How can I find my credit score?

You can get a copy of your credit report and credit score for free every 3 months. Check your credit report by contacting one of these credit reporting agencies:

• Equifax: phone 138 332
• illion: phone 132 333
  
• Experian: phone 1300 783 684
  

Simply call to get your credit score on the spot or access your report online within a day or two. You could have to wait up to 10 days to get your report by email or mail. Checking your credit report will NOT impact your credit score. 

Alternatively, you can find out your credit score online for free through government financial guidance site Moneysmart, or financial comparison sites like Canstar.

There’s no doubt about it, having a positive credit report makes it much easier to get approved for a personal loan. The good news is it’s easy to build and polish your credit history and you don’t need to take out a credit card to do it. 

Consider lowering your credit card limit and try to pay more than the minimum repayment. Remember, applying for multiple loans over a short period of time can look bad on your credit report. Reducing the number of applications you make for credit will improve your credit score over time. 

Avoid late payments on your bills, including mobile phone plans and Afterpay. Setting up direct debit payments for these bills will mean you always pay on time and will begin to create a more positive credit history. 

The amount of time it takes for negative incidents to be erased from your credit report depends on the type of credit event that occurred.  

How much can I borrow if I have bad credit? 

Just as everyone is different, every personal loan is also different. The amount you can borrow will depend on your individual life circumstances, including your income, expenses and other debts. 

Take the time to work out how much you can afford to pay each month on top of your current expenses. You can crunch the numbers on this useful calculator on the MoneySmart website. 

Remember, every time you apply for credit (including credit cards and personal loans) it affects your credit score. Find out which lenders are likely to approve your loan before you submit an application to prevent a black mark on your credit report. You can do this by contacting the lender to make an initial enquiry, rather than submitting a full application. 

When considering your application, lenders will take into account:

• Credit history
• Income
  
• Other debts
  
• Every-day expenses
  
• Loan amount
  

Will my personal loan be secured or unsecured?

Even if you have a bad credit score, the lender may agree to offer you a secured personal loan. This type of loan is usually secured against an asset of value. This means if you can’t make repayments, the lender can take the asset and sell it to recover the cost of the loan. 

An unsecured personal loan, on the other hand, does not require an asset to be provided to secure the loan, so it is considered riskier for the lender. Keep in mind, even if you are approved for an unsecured personal loan, there is always the possibility of the lender taking you to court if you default on the loan. In this situation, your credit rating would be negatively impacted. 

Which lenders offer personal loans to borrowers with bad credit?

Peer-to-peer lenders

When you’re researching personal  loans, it pays to look beyond the ‘Big Four’ banks. Online lending platforms, also known as peer-to-peer lenders, often provide a faster approval process and lower interest rates than traditional lenders. 

This type of lender, also known as ‘peer-to-peer’ lending or marketplace lending, allows you to seek a loan from a private lender. All P2P lenders set their own loan requirements and terms. 

If you have a bad credit score, it’s possible that your personal loan will come with higher interest rates and fees, so it’s a good idea to check the comparison rates of various lenders to make sure you find the best loan option to suit your needs. Comparison rates do the hard maths for you by rolling together the interest rate, upfront fee and service fee into one percentage figure. It gives you a more accurate understanding of the cost of your loan. 

Financial comparison sites like Canstar, Ratecity, InfoChoice and Mozo can help you find and compare the best deals on personal loans quickly and easily, including loans offered by P2P lenders. 

Banks and credit unions 

Some banks and credit unions may approve personal loans for people with bad credit scores, but only if they meet their additional strict criteria. 

Specialist bad credit lenders

Some lenders offer loans designed specifically for borrowers with bad credit. But it’s important to be aware of the loan features listed in the terms and conditions. Often, these types of loans come with high interest rates and fees to offset the risk to the lender. Make sure you can afford the total cost of the loan before you sign on the dotted line. 

Guarantor personal loan 

Having a family member or friend with good financial status and credit history act as a guarantor application could improve your chances of being approved for a personal loan if you have no credit score yourself. This means they co-sign the loan and agree to accept responsibility for the repayments if you default for any reason. Your guarantor acts as a type of security, making it less risky for your lender to loan you the funds. 

You might even be able to borrow a larger amount and secure a lower interest rate if you have a guarantor on your personal loan, which means you’ll save money over the life of the loan. 

But remember, it’s a big responsibility for both of you. If you can’t make repayments down the track, your guarantor will need to foot the bill, which could damage your relationship or impact family dynamics. 

Need a helping hand?

When you fall into financial hardship, it can be hard to see the wood for the trees. Remember, you’re not alone. You can seek help from qualified professionals free of charge through the National Debt Helpline (NDH). Call 1800 007 007 to find a counsellor near you.