Do bad credit personal loans with guaranteed approval exist?

If you have a bad credit rating and are struggling to get a loan, the idea of a bad credit personal loan with guaranteed approval may seem tempting. But do these types of loans even exist in Australia?

Who offers bad credit personal loans with guaranteed approval?

Lenders in Australia are not allowed to offer bad credit personal loans with guaranteed approval. This is because they are legally required to comply with responsible lending obligations. 

Under the National Consumer Credit laws, banks and other lenders can’t lend you money if they think you can’t pay it back. Lenders are required to make reasonable inquiries about why you want to borrow the money and reasonable inquiries about your financial situation. For example, this might involve asking about your income and living expenses such as rent or mortgage repayments, expenses and other debt.

Because of these obligations, it’s not legally possible to offer a personal loan with “guaranteed approval” in Australia. If a lender does so, they may be in breach of their responsible lending obligations or it could be a sign of a loan scam. 

Watch out for loan scams

If a company contacts you out of the blue and offers you a personal loan with guaranteed approval – or any other type of loan, for that matter – be wary as this could be a scam. 

The Western Australian Government says another sign of a potential scam is if you are asked to pay fees upfront and if this involves wire transferring the money or putting it into a bank account. You can read its list of online loan scam prevention tips here

It could also be a good idea to check Moneysmart’s list of companies you should not deal with. If the company contacting you is on this list, Moneysmart says you should avoid it. If it is not on the list, Moneysmart says to check whether it has an AFS licence. Australian financial services companies are legally required to have an AFS licence to operate in Australia. You can check ASIC Connect’s Professional Registers to see whether the company is licenced. 

What are bad credit personal loans?

Although they don’t come with guaranteed approval, some lenders offer ‘bad credit personal loans’. These are simply personal loans that are aimed at those with a poor credit score. They are typically offered by non-bank lenders (lenders who source their own funding, such as peer-to-peer lenders, and are not banks, building societies or credit unions). 

Bad credit personal loans are still subject to approval, but lenders usually look at more than just your credit score when considering your application. For example, providers may look at your current relationship with money and your personal circumstances rather than basing its approval decision on your credit score alone. 

Interest rates on bad credit score loans

Be aware that bad credit personal loans may have a considerably higher interest rate, compared to personal loans available to those with a good credit score. According to credit score provider Credit Savvy, many personal loan providers use ‘risk-based pricing’, which means the riskier a lender thinks you are, the higher the interest rate you’ll pay. 

To give you an idea of how interest rates can vary on personal loans, Canstar Research found that (as at 10 February 2020) the minimum interest rate on our database for an unsecured personal loan of $10,000 was 5.75% (comparison rate 8.62%), and the maximum rate was 32.95% (comparison rate 37.91%). The median interest rate was 11.99%. This was based on loans (excluding overdrafts) available to buy a used car, consolidate debts, renovate or spend on a holiday, with a total loan term of five years.

Impact on credit score

Also consider that if your credit score is already low, applying for a new loan could impact it further. Each loan application you make is generally recorded on your credit report, while your repayments on the loan are also recorded. It’s important to make sure that you will be able to afford the repayments on the loan before applying.

Bad credit personal loan
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What are some other bad credit score loan options?

Secured personal loan

A secured personal loan is a loan that is ‘secured’ against an asset you own, such as a car or a motorbike. Secured bad credit loans may have lower interest rates and fees compared to unsecured bad credit loans, although this could depend on the lender and specific loans. It’s important to keep in mind that if you fail to meet your loan repayments on a secured loan, your lender may be entitled to take possession of your asset and sell it so it can recover its money. 

Guarantor personal loan

A guarantor personal loan is a loan that is guaranteed by a friend or family member. This may make it easier for you to get approved for a loan where you might otherwise not qualify. Moneysmart also notes that some lenders may offer you a lower interest rate if you have a loan guarantor. If you ask someone to go guarantor for you, keep in mind that they will be legally responsible for paying back the entire loan, including any fees, interest and charges, if you fail to make the repayments. 

Payday loans

Another option – albeit one with some significant drawbacks – is a payday loan. This is a type of loan up to $2,000 which you have between 16 days to one year to repay, and which may be easier to obtain compared to a personal loan from a bank, although you would need to carefully consider whether they are a suitable source of finance given some of the risks that are involved. The reason they can sometimes be easier to be approved for is that in many cases, payday lenders do not require a credit check. Payday lenders cannot charge interest on payday loans, but Moneysmart warns that they can charge a lot in fees. For example, these lenders can charge you an establishment fee of up to 20% of the amount borrowed and a monthly service fee of up to 4% the amount borrowed. Additionally, the National Debt Helpline warns some payday lenders may charge late fees of $7 per day, and default fees of “up to twice the amount you borrowed” if you fail to pay back the loan. Therefore, before considering a payday loan it’s important to consider your other options carefully and whether there are cheaper ways to borrow money if you need it. 

No interest loans

The No Interest Loans Scheme (NILS) offers loans with no interest, fees or charges and no credit checks. Through the scheme, you can borrow up to $1,500 to pay for essential goods and services like fridges and medical procedures. To be eligible, you must either have a Health Care or Pension card or earn less than $45,000 a year after tax ($60,000 for joint applicants or people with children). You must also have lived at your current address for more than three months and show that you can repay the loan. 

StepUP loan

A StepUP loan may be another option, however, a credit check is required. StepUP loans are low interest loans that are designed for people on low incomes who have difficulty getting credit from a bank. You can borrow between $800 and $3,000 and have up to three years to repay it. There are no fees and a fixed interest rate of 5.99% p.a. (comparison rate 5.99% p.a.) To be eligible you must have a Health Care or Pension card or receive Family Tax Benefit A and have resided at your current premises for over three months. 

Borrow from family or friends

Another option could be to ask a friend or family member for a loan. However, this option does run the risk of damaging your relationship, particularly if your family member ends up needing the money back sooner than they originally thought. If borrowing money from friends or family, the National Debt Hotline recommends that both parties agree on exactly how and when the money will be repaid. If you think it will take you a while to repay the loan, make sure your friend or family member understands this. Even if you don’t have a written contract, be aware that your friend or family member could possibly still take you to court if you don’t pay back the loan. 

How to improve your credit score

If you have a bad credit score, the good news is that there are steps you can take to help improve it. For example, you could: 

  • Make sure you make credit repayments and pay bills on time.
  • Limit new applications for credit or loan products where possible. 
  • Consolidate any existing loans and debts.
  • Consider lowering the limit on any credit cards you have, if appropriate.
  • Regularly check your credit report and make sure the information is correct (if not, you can ask to have it changed, or have comments added to your report). 

Although your credit score won’t change overnight, it can be improved over time as more information is added to your report. Negative information (like defaults and court judgements) will also gradually drop off. 

You can find out more about credit scores and check your score for free, by visiting Canstar’s credit score information hub.

Getting help to manage debt

If you need help getting on top of your debt, you can call the National Debt Helpline on 1800 007 007 to speak to a free financial counsellor independently and confidentially. You may also be able to get free financial counselling through some community organisations and government agencies. A financial counsellor may be able to help you with things like managing bills, dealing with debt collectors and tax debts. If you need legal advice, you may be able to get free legal advice by contacting a community legal centre or a legal aid agency. 

Main image source: wan wei (Shutterstock)

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