Bad Credit Loans Explained
Bad credit loans are personal loans offered to borrowers with a bad credit rating. Borrowers with Equifax credit scores below 500 may experience difficulty securing loans since most lenders are hesitant to offer cash to individuals with poor credit histories. This is because borrowers with low credit scores are seen as higher risk and less likely to repay the loan.
What are the Advantages of a Bad Credit Loan?
Approval for borrowers with a poor credit history
Borrowers with poor credit records are eligible to apply for a bad credit loan and may access money at times when there are no other options available.
Chance to consolidate existing debts
Borrowers may use a bad credit loan to consolidate existing personal loans.
Improve credit score
While taking on another loan will slightly drop your credit score, meeting your repayments will improve your credit score in the long run since paying on time shows positive financial behaviour.
What are Bad Credit Loans?
Bad credit loans are personal loans for people who have a bad credit history.
The product can be secured or unsecured. Unsecured loans range from $500 to $10,000 and may be paid from 13 up to 60 months. For secured loans, the amount may range from $2,000 to $70,000 with loan terms ranging from 1-7 years. Most lenders accept cars, motorbikes, caravans, or boats as loan security. Other lenders, such as Cash Stop, can consider gold jewellery and other electronic devices as security for the loan.
These personal loans give a chance for borrowers with a bad credit score to access funds. Repaying the loan on time will also contribute to building a better credit score for the future.
How do Bad Credit Loans Work?
Borrowers can typically apply online for a bad credit loan. This online loan application process will require you to submit personal information, contact details, employment information and bank account details. Bank details are required so the lender can review your most recent bank statements and assess your ability to meet repayments. All responsible lenders will require bank statement data and will handle your information with great care.
Some lenders may also ask for ID evidence and, if applying for a larger secured loan amount, you may need to submit necessary details and valid proof of ownership for the collateral.
Pre-approval from bad credit loan providers can range from an hour to 1 business day.
You should meet the following to be eligible to get a bad credit loan:
- Over 18 years of age
- Receiving regular income. Centrelink benefits should be no more than 50% of your total income.
- Active contact details such as email and mobile phone.
- Australian resident
Credit checks may still be conducted as part of the responsible lending policies of lending institutions.
What are the Fees Related to a Bad Credit Score Loan?
The fees typically associated with loans for bad credit are as follows:
- Interest rates: Interest rates typically range between 11 % to 18% per annum. This rate is higher than prime rate loans because borrowers with poor credit ratings are regarded as less “creditworthy” and may struggle to repay a loan. As a result, lenders compensate for this risk by raising interest rates. For loans below $2,000, monthly fees should not exceed 4% of the loan amount.
- Establishment fees: Establishment fees will not exceed 20% of the loan amount for loans below $2,000 and $400 establishment fees for pans between $2,000 to $5,000.
Other fees involved in loans for bad credit can include:
- Dishonour Fees: If you fail to make your loan repayments by the due date, this charge may be deducted from your account.
- Debt Recovery fees: If the lender has reason to visit you concerning your arrears, this charge or any greater amount the lender may incur may be payable and credited to your account.
What are the Repayment Options Available?
Cash loans for bad credit up to $2,000 may have a 16-day to 12-month repayment period. Loans of $2,001 up to $5,000 may be paid over a term of 16 days to 24 months. Loans above $5,000 may have a repayment term of more than 2 years. Repayments are usually scheduled either monthly, fortnightly, or weekly, with agreed instalments indicated in your loan contract, subject to additional fees in the event of non-payment or late payment.
Always check and consider the repayment schedule before signing any loan contract to prevent yourself from being subjected to late payment and default fees.
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Tips for Improving Your Credit Score
The following are the tips to improve your credit score:
- Pay down your existing loans: Paying off your debts lowers your risk as a possible borrower. Work on paying off your debts, lowering your credit limits, and cancelling accounts you no longer use.
- Check your credit report and correct errors: You may increase your credit score by removing inaccurate credit report items lowering your score. If you discover an inaccuracy in your credit report, you must first notify the credit reporting organisation so that the situation can be investigated. If the error is confirmed, it will be fixed and updated in your credit report at no cost.
- Lower your credit utilisation rate: The credit utilisation rate is the ratio between your loan amount and your maximum loan limit. Keeping your utilisation rate between 20-30% can improve your credit score and help you manage your budget and finances.
- Create and stick to your budget: This is the old-school budgeting method for improving your credit score. By keeping your expenses on track, you will prevent unnecessary shortages that could result in having to apply for additional loans. Budgeting will also help you pay off existing loan accounts.
What are the Alternatives to Bad Credit Loans?
Here are some alternatives to a bad credit loan:
- Borrow from friends or relatives: If you have an urgent need for cash, you may consider borrowing from friends and family.
- No-interest loan: No-interest loans are provided by 170 local community organisations in 600 locations around Australia. With these loans, you may borrow up to $1,500 for a period of 12 to 18 months. There are no interest rates, fees, or taxes on these loans. You will just have to repay the amount borrowed.
- Credit Cards: Unlike bad credit loans, credit cards will perform a credit check but may have lower thresholds to approve. A well-managed credit card can help build your credit score over time.
Bad Credit Loans FAQs
- High-interest rates: They can be subject to higher interest rates than you would get with an average personal or secured loan.
- Chance for loan rejection: There is still a chance your loan application will be rejected. This could further lower your credit score since it will leave a hard enquiry record on your credit report.
No. Lenders require access to your bank account to check for your income transactions within a 90-day period. For no credit check loans, this is a legal requirement to assess your loan affordability and to ensure that you can repay the loan on time. The bank account will also serve as the disbursement channel for the loan.
The effect of a bad credit loan on your credit score will depend on your repayment behaviour. If you pay off your loan on time, your credit score will improve in the long run. It may initially reduce the score by a couple of points since your debt-to-income ratio will shift and you will owe more money.
However, if you meet your loan payments, your credit will improve due to positive financial behaviour. As a result, the chances of obtaining favourable lending conditions in the future will increase.
If you do not make the necessary payments on time or if you default on payment, bad credit loans will lower your score since the lender may report your default to credit reporting agencies. This default will show in your credit report and could deter future lenders.
A credit report is a summary of how you have managed credit accounts, including the types of accounts and your payment history, as well as some additional information that your lenders and creditors submit to credit agencies.
This is an important indicator for the lenders on the risk of lending you any amount of money. A bad credit loan can be on your credit report for up to 10 years. Late payments may stay up to 7 years on your credit report from the date of delinquency.