Getting a Loan with Bad Credit

Loans with Bad Credit

Unexpected life events happen to people all the time. Things like changes in relationships, temporary sickness or an unanticipated period of unemployment are pretty common. 

These types of surprises might make it difficult to pay our bills or make our repayments on time, which can harm our credit history.

In other words, there’s a number of valid reasons why you might have bad credit.

Many Australians wrongly believe that they can’t get a loan with bad credit. This may not be the case. There are funding options for people with bad credit.

What Does Bad Credit Mean?

Bad credit is a term that refers to a person’s history of not paying loans or bills on time. It also signals the likelihood of the person failing to meet their financial obligations in a timely manner in the future.

This credit history is expressed with a score that shows the borrower’s credit risk. A low credit score indicates bad credit, while a high credit score means that the person will meet their financial commitments on time. A borrower with bad credit runs the risk of being rejected by lenders or having to pay a higher interest rate on a loan.

What Factors Determine Whether You Have Bad Credit?

If you’ve ever missed a payment on a credit card, mortgage or any sort of loan, then this is probably recorded on your credit file. Your credit history is stored by ratings agencies like Equifax.

Your credit file contains your personal information such as:

  • Name
  • Date of birth
  • Home address
  • Driver’s license number
  • Current and previous employer information
  • Credit application activity

It also stores all the loans for which you have applied in the last five years, which is labelled as ‘Enquiries’. Therefore, it is a good rule of thumb to only apply for credit once every six months so as to avoid too many enquiries on your credit file which can create a red flag.

Other elements of a credit file include court judgments, court writs, and bankruptcy history.

Borrowers who have been declared bankrupt will have that stay on their credit rating file for seven years.

These types of listings are a stain on your credit history and can prevent you from securing a favourable loan.

How to Secure a Loan With Bad Credit

Major lenders will most probably reject your application but there are specialist lenders in Australia that are more flexible.

Many specialist lenders have carved out a niche in the bad credit loans space and are therefore able to assess these applications with an open mind and sometimes much more rapidly than major lenders.

These lenders assess applications on a case by case basis. They understand that bad credit can occur as a result of unexpected life events, such as an illness or divorce, and will consider other factors when deciding whether to give you a loan. You can explain to them what went wrong, show the steps taken to overcome these problems, and why a loan will improve your financial situation.

Tips to Help You Get Approved

There are a few things borrowers with bad credit can do to improve their chances when applying for a loan:

  • Show the lender that you’re taking steps to pay off your debts: Lenders will want to see that you’re paying off your previous creditors. If you pay off all your debt before applying this will be one less reason a lender has to deny your application. So, try to get rid of your other debts to bolster your application.
  • Be open about your bad credit listings: The lender will also ask for an explanation regarding your bad credit, and you will have to provide a detailed response. If you try to hide something, this will simply make the lender more suspicious. You will come off as untrustworthy. This may lead to your application being rejected because you were not fully honest about your financial circumstances.
  • Don’t apply with a partner who has bad credit: If your spouse has bad credit, then you might be able to avoid the higher interest rates of a bad credit loan or rejection by applying as a single candidate. Note, however, that if you apply by yourself your borrowing capacity may be reduced.

Things to Know About A Bad Credit Loan

Fundamentally, a bad credit loan is much like a regular loan except that the loan is more restricted and the borrower has to pay higher fee charges. When a borrower with bad credit takes out a mortgage, they may have to offer a deposit greater than 20% of the property’s value.

Also, borrowers with bad credit typically pay higher ongoing and upfront mortgage fees.

Final Thoughts

Borrowers shouldn’t let bad credit deter them from applying for loans that can help their financial situation. However, before applying for a loan, it’s crucial that you consult with an experienced finance broker. Aviator Advisory can help you prepare your case and present it to a specialist lender on your behalf.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.