Bad credit personal loans: What to watch out for?

What are bad credit personal loans?

Bad credit personal loans are loans designed for individuals with a poor credit score. A less-than-perfect credit history can make it difficult to qualify for traditional loans, but some lenders may still be willing to offer credit if you can demonstrate the ability to repay. However, these loans often come with higher interest rates and fees to offset the increased risk to the lender.

What to watch out for when applying for a bad credit personal loan?

A bad credit personal loan could give you access to cash in an emergency, but it’s important to understand the potential risks and costs to make an informed decision.

Interest rates on bad credit score loans

Be aware that bad credit personal loans often come with considerably higher interest rates compared to standard personal loans available to borrowers with good credit scores. Many lenders use a system called risk-based pricing, which means the higher the perceived risk you pose as a borrower, the higher the interest rate you’ll be charged. This pricing is based on factors such as your credit score, income, outstanding debts, and repayment history.

Impact on credit score

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. If you make multiple applications within a short space of time, this could negatively impact your credit report. Your repayments on the loan are also recorded. Therefore, it’s important to make sure that you will be able to afford the repayments on the loan before applying. If you miss your repayments, this could also have a negative impact on your score.

If you are concerned about your credit score or unsure you can meet all repayments, carefully consider whether taking out this type of loan is a good idea at all.

If you don’t know your credit score, you can easily check it for free on Canstar’s website or through the Canstar app.

Fees and charges

Bad credit personal loans may come with higher fees, including establishment fees, monthly account-keeping fees, and early repayment penalties. These additional costs can significantly increase the overall expense of the loan, so it’s important to review the full fee schedule before committing.

What personal loans could be available to borrowers with bad credit?

There are different types of personal loans that may potentially be available for borrowers with bad credit, including secured and guarantor personal loans.

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 loan product.

It’s important to be aware 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.

Who offers bad credit personal loans?

Bad credit personal loans are typically offered by non-bank lenders—financial institutions that source their own funding rather than operating as banks, building societies or credit unions. These may include peer-to-peer lenders or some alternative finance providers. While non-bank lenders may be more flexible with their lending criteria and willing to consider applicants with poor credit histories, they do not guarantee approval.

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 such as your income and expenses.

It’s important to remember that each lender will have its own assessment and eligibility criteria for personal loans. As with any lending arrangement, it’s worth reading the terms and conditions carefully to make sure you understand what you are signing up for.

Can I get bad credit personal loans with guaranteed approval?

Lenders in Australia are not allowed to offer bad credit personal loans (or any kind of credit product) 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 Australian Securities and Investments Commission (ASIC) warns that scammers may target people with fake personal loan offers. Some signs of a potential scam include being asked to pay fees upfront, especially if you are told to wire the money or deposit it into a bank account. Learn how to spot and avoid loan scams at the Australian Government’s official ScamWatch page.

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 licensed.

Alternatives to bad credit personal loans

If you have a poor credit history but need to borrow money, there are a few other options that may suit your situation—some of which could be more affordable or lower risk than a standard personal loan.

No interest loans

The No Interest Loans Scheme (NILS) offers loans with no interest, fees, or charges. Through the scheme, you can borrow up to $2,000 to pay for essential goods and services. For housing-related costs or natural disasters, loans up to $3,000 may be available. To be eligible, you must hold a Health Care or Pension card, have experienced family or domestic violence in the past 10 years, or earn less than $70,000 per year before tax (or less than $100,000 for joint applicants or those with dependents).

You generally need to have lived at your current address for at least three months and demonstrate the capacity to repay the loan within the agreed term, which is usually up to 24 months. Unlike traditional loans, NILS funds are paid directly to the supplier or service provider, not to the borrower.

Centrelink advance payment

If you receive Centrelink benefits, you may be eligible for an advance payment. This lets you access a portion of your future payments early and repay it over time, interest-free.

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 you’re borrowing money from friends or family, it’s important to be clear about how and when you’ll repay it.

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 to help you to pay them off.

• 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).

Although your credit score won’t change overnight, it can be improved over time as more information is added to your report. Negative listings—such as defaults, missed payments or court judgments—won’t stay on your report forever. These usually drop off after a few years, helping your score recover if you keep up good credit habits.

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.

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