A bad credit score doesn't mean you're a bad person. It doesn't even mean, necessarily, that you're bad with money. If you've never had a credit card, loans, or a utility in your name, you can still rate badly with lenders, as you've no financial history for them to check.
But a bad credit score can mean that it's harder, and more expensive, to borrow money. However, even if you've a black mark by your credit score, don't stress, because it's still possible to get a personal loan with a bad credit score.
When institutions lend money, their main concern is losing their cash. Your credit rating reflects this risk. If, in the past, you've missed payments on a loan or bill, lenders will consider you a higher default risk. To cover this increased risk, they'll charge you a higher rate of interest.
Currently, Canstar rates over 50 personal loans from 10 providers. And there's a big difference in interest rates and charges on our database. Some lenders don't have establishment fees, while others charge over $350. And while interest rates start around 8%, they can be as high as 29%.
But just because you've got a bad credit score, it doesn't mean that you'll not be able to get a loan.
Loans for bad credit: when the banks say no
Quite often the big banks will refuse to lend money to people with bad credit scores. They tend to offer lower interest rates but, as a result, limit the number of riskier loans they grant.
However, many smaller lenders make it their business to lend to people with imperfect credit histories. And while their interest rates may be higher, they are an accessible option if you need funds.
Each lender will look at your credit history differently, and have their own ratings system.
Loans for bad credit: how to fix your credit score
If you don't need the money immediately, it could pay to work on improving your credit score before applying for a loan, to secure a lower interest rate.
Improving a credit score isn't a quick or easy fix, however it is possible. And taking back control of your personal finances will have other long-term benefits, ultimately helping you save for a brighter financial future.
Things you can do to improve your credit score, include:
- Paying your bills on time
- Not applying for new credit
- Paying off existing loans and debts
- Lowering the limit on your credit cards
For more information on improving your credit score, check our our story: How to Fix a Poor Credit Score.
Loans for bad credit: check the fees and charges
Regardless of your credit score, you should always thoroughly read the small print of any loan agreement. There are many hidden fees and charges that can apply, and you need to be across all of them before you sign on the dotted line.
Things to look for include:
The per annum interest rate and loan period
Always check the exact interest rate that you'll be paying. Most loan companies have calculators and are clear about their true interest rates. Per annum, or p.a., is the rate you want to concentrate on – which is the standard measure of interest rates.
Also make sure that you know the exact term of your loan contract before you sign. Some repayment calculators on loan companies' websites are not clear about the length of the loan period.
A low monthly repayment sum might look attractive, but if you're paying it for years and years, you'll end up paying more for your loan. So check the term of the loan, not just the monthly repayments – the longer the term period the more you're likely to pay.
Fees and charges
- Establishment fees – some lenders don't charge establishment fees. Others charge a fee depending on the size of your loan. Be aware of how much you're paying as a proportion of your loan.
- Brokerage fees – some loan websites belong to brokerages, not loan providers. For recommending your business to a loan provider, the brokerage will exact a fee, which could be up to $1000.
- Administration fee – this is an ongoing fee charged over the life of your loan to cover the costs of administration. Some lenders don't charge this fee, others charge $7.50 per month. Over a three-year loan, a $7.50 monthly fee adds up to an extra $270 on your repayments!
- Variation fee: to change the terms of your loan.
- Full repayment fee: to pay off your loan early. This can run into big amounts if it covers the lender for any loss of interest.
Loans for bad credit: shop around
Ultimately, the best way to ensure you get the most advantageous loan rate is to do your research, and to check out all the lenders in the market.
Even if you've a poor credit rating, there are loan options available. If you're willing to shop around and compare lenders, you don't have to pay sky-high fees and interest rates.
