6 Loan options for people with bad credit
From home equity loans to borrowing from family or friends, there ARE loan options for Aussies with bad credit that don't qualify for traditional financing options and we're going to run through these to help you find the most suitable one.
Whether you have good or bad credit, you should be able to apply for a loan to solve your financial situation and give yourself peace of mind but, you're certainly looking at a different ball game.
You'll be viewed as a high-risk borrower and the requirements, procedures and rates may therefore be slightly different.
Getting to the core of your bad credit issue
Understanding the reason that you have a poor credit score and working on rectifying these issues should be your priority. To find out how to fix your bad credit, head on over to our 6 step guide to fix your bad credit and get to work on changing things around!
Improving your credit score allows you to apply for standard loan types instead of loans designed for bad credit applicants. But time is not always on our side and turning your bad credit around will take a long time. So while you get to work for the long run, let’s take a look at the loan options you have available to you despite your bad credit.
The quest for suitable loan options
There are still avenues open to those battling with bad credit scores. The key lies in finding suitable loan options specifically designed for individuals facing these challenges head-on.
The primary objective is to discover lenders who understand that one's past financial mistakes do not define their present circumstances or future potential. Finding these specialised loan options involves research and understanding the unique terms and conditions that come with them.
While it may require a bit more effort than obtaining a loan with good credit, the reward of finding a suitable loan can be life-changing. It can provide the financial boost needed to fund important projects, consolidate existing debts, or even rebuild your credit history over time.
In the following sections, we'll dive into both traditional and non-traditional loan options available to those with bad credit in Australia. From home equity loans to peer-to-peer lending platforms, there is an array of possibilities waiting to be explored. Remember, while bad credit may have closed some doors, resilience and resourcefulness will help you find new ones.
Secured vs unsecured loans: Understanding the difference
When exploring traditional loan options for people with bad credit, it is essential to grasp the difference between secured and unsecured loans.
Secured loans require collateral – an asset such as property or a vehicle – which acts as security for the lender in case of default. The presence of collateral reduces risk for lenders and may result in more favourable terms and lower interest rates. On the other hand, unsecured loans do not require collateral but are instead granted based on your ability to repay.
These loans are typically more challenging to obtain with bad credit, as lenders prioritize minimising their risk. Consequently, unsecured loans often come with higher interest rates and stricter repayment terms.
Understanding these loan types will help you make informed decisions when considering traditional lenders for your borrowing needs. Remember to carefully assess your financial situation and weigh the pros and cons of each loan option before making a final decision.
Loan options for Australians with bad credit
Option #1: Home Equity Loans
This is probably the most viable option for people with bad credit looking to
apply for a loan. You can easily apply for a low-interest, tax-deductible loan if you have enough equity in your property. This could be seen as a secured loan. So, should you default on your payment, you will be putting your property in jeopardy. Luckily, this is avoidable by simply holding to your repayments.
If you are serious about repaying your loan and you have a reliable income, it is probably your most inexpensive option to get a loan. Many traditional and alternative lenders will be willing to help you if you can secure the loan with your home equity.
Option #2: Credit union loans
Generally, credit unions are owned by their members who bear something in common. Whether it be industry-related or the same geographical area, for example, it's a viable solution should you wish to apply for a loan with bad credit. Usually, credit unions are non-profit organisations that offer lower fees to their members. This is an option you can look into before you look elsewhere to apply for a loan.
These institutions are known for their stricter lending criteria, making it challenging if you have an imperfect credit history to secure loans. However, it's crucial to explore this option as these loans often come with more favourable terms and lower interest rates compared to alternative options.
Typically, they'll consider factors such as your credit score, income stability, employment history, and existing debts. Meeting these criteria can be demanding, but not impossible.
Having a steady source of income or collateral could increase your chances of approval. It's important to note that traditional lenders may have stricter limitations on the amount they're willing to lend to individuals with bad credit.
This is often done as a risk mitigation measure due to the borrower's perceived higher likelihood of defaulting on the loan. Therefore, it's essential to assess your financial needs realistically before approaching these institutions.
Option #3: Peer-to-peer loans
Here is another viable solution for individuals who wish to apply for a loan with bad credit. It is a form of lending that has been around since about 2005 and seems to be growing in popularity.
You'll find peer-to-peer loans on an online platform, from which you borrow from an individual as opposed to an institution. The process allows you to pay low-interest rates and the investors earn high-interest rates, making it viable for both parties.
Simply find a peer-to-peer lending network that suits your needs as there are many online peer-to-peer lenders available. You'll be required to list your loan and the amount you wish to borrow including the reason you wish to loan the amount indicated.
Investors then review these loan listings and choose who they wish to loan to. Investors screen the applicants that they are considering, which do include credit checks. However, an investor might be more lenient and grant you the loan, regardless of your bad credit.
The advantage lies in the more lenient eligibility criteria compared to traditional lenders, allowing individuals with poor credit scores or limited credit history to secure funds.
The assessment process on peer-to-peer lending platforms typically involves evaluating various factors beyond just credit history, such as income stability or employment prospects. Interest rates may still be higher than those offered by banks, but they can be lower compared to other alternative loan options available for people struggling with bad credit.
Option #4: Co-signer
If you have a family member or friend with good credit, they might be willing to co-sign for you, which is another nifty solution to your financial issue. If someone is fully aware of your situation and believes you will repay the loan, they might be more than willing to co-sign for you.
You should always keep in mind that should you default on payments, the lender is entitled to claim the outstanding fees from the person who co-signed. To prevent tarnished relationships, you should avoid defaulting on the repayment at all costs.
The payment history and status will reflect on both parties’ credit records. All these details should be disclosed to the person who is prepared to co-sign for you.
Bad credit loan calculator
Option #5: Loans from bad credit lenders
There is a wide range of bad credit loans available on the market from alternative and online credit providers. These loans may not offer the competitive rates that banks, credit unions and peer-to-peer lenders do, but they're typically willing to take on more risk than such traditional lenders.
These loans can be both secured and unsecured, depending on the lender as well as the loan amount you're looking to obtain.
Option #6: Payday loans for quick cash at a cost
When faced with bad credit, some individuals turn to payday loans as a short-term solution to meet their immediate financial needs. Payday loans provide quick access to cash but come with high-interest rates and short repayment terms.
These loans are typically small amounts intended for temporary financial emergencies rather than long-term solutions. It's crucial to be cautious when considering payday loans due to the potential cycle of debt they can create if not managed responsibly.
Option #7: Loans from a family member or friend
This should perhaps be one of your first options if you are in need of money but have bad credit. Lenders take a risk by loaning money to high-risk individuals and one can therefore understand that they often reject these types of applications.
However, a friend or family member might still be keen to help you out of your financial difficulty. This might also be your most cost-effective option as often family members will charge little or no interest on loans. You can always draw up a written agreement to ensure both parties are satisfied with the arrangement made.
Our top tips for bad credit loan approval
- Always obtain a copy of your credit report and find out the cause or causes behind your poor credit rating.
- Make improving your credit a priority.
- Start your bad credit loan search with credit unions, P2P lenders and alternative options like borrowing from friends and family to try and secure competitive rates.
- Always borrow only what you need only.
- If you can offer security for your loan, do so to reduce your loan cost and increase your chances of approval.
- If your loan application is denied, do not try to apply for another loan, this will worsen your credit score even more.
- Using a broker may help you find bad credit loan options and secure approval without making multiple loan applications.
It should be a relief to know that no matter what your current credit status is that there is an option for you to solve your financial situation. Loans for people with bad credit are there to assist you. Our section dedicated to bad credit lenders will give you a host of online loan lenders ready to assist you.
Remember that improving your credit history should always be a long-term goal while seeking financial assistance. By consistently making repayments on time and managing your finances responsibly going forward, you can rebuild your credit and gain access to more favourable loan options in the future. If you're facing financial hardship should consider exploring government assistance programs like NILS (No Interest Loans Scheme) and StepUP Loans that aim to support those in need without imposing excessive interest charges.