Obtaining a loan once you have a bad credit rating can be difficult. Sometimes it is due to the lender not feeling secure that your current financial position will leave you capable of servicing your loan – other times it is prejudice from past mistakes around credit that continue to haunt, regardless of how well you are doing now.
To better increase your chances of approval, regardless of your bad credit history – you must first understand your available options and the concerns that the lenders will hold.
The below information will help you in understanding loans for people with bad credit.
What are lenders concerned about?
When assessing whether to issue loans for people with bad credit in Australia, most lenders are concerned about only one thing; will you be able to repay the loan? (e.g. not meeting your repayment requirements).
The trick to proving this is not an issue is to be able to provide some substance and paperwork around the fact that regardless of your past mistakes, you have the capability to earn money now that will in turn be used to repay your loan.
This means the more detail you can show around your salary and income streams the better. A lender is less likely to refuse you a loan if they can see your earning potential and in turn write off any past bad credit situations to an exact reason. So be sure to tell them exactly what happened in the past and how you proactively went about fixing it or why the issue occurred.
See what the lenders can see
The trick to the step above is to be prepared. This means you should get a copy of your credit report (known as your credit history) prior to applying for a loan.
This document can show you exactly what the lender will see, giving you the ability to either attempt to fix the issue before hand or at bare minimum begin drafting an exact reason and response to give the lender about the default (bad credit note).
Loans for people with bad credit should really be a last resort, as opposed to the only option. See what you can do to repair your credit rating beforehand and hopefully begin looking for loans just as anyone else would.
We suggest you use Veda Advantage at MyCreditFile.com.au – there are both paid and free versions, though someone who is serious about this should get the paid version.
What options are available for bad credit loans?
There are two main options:
Avoid big banks, opt for non bank lenders if you think you have bad credit
Often the big banks are the ones who have the greatest concern about bad credit loans. Opt instead to talk with a non bank lender – someone who is likely supported by the bigger banks for funding, yet operate their own loans.
These providers often have competitive home loans and personal loans that have more leniency built into them for people with a bad credit history.
Low doc loans for people with bad credit
Another option is the idea of a low doc loan. These are both good and bad and really require the applicant (you!) to be smart about their thinking. These loans will often let you apply with very little to know paperwork or proof of income, so can be ideal for people who are self employed or have alternative cash flow issues to deal with (such as regular lump sums).
Low doc loans receive a fair bit of criticism and rightly so. They can allow lenders to do ‘predatory lending’ in the sense that money is lent to people who cannot afford it. Remember to be honest with yourself and realistic before agreeing to anything.
As someone with bad credit, what should you avoid when applying for your loan?
Avoid going straight away to lenders who specialise in bad credit. Specialists can be both good and bad, though some will charge much higher fees and rates to lend – thus not really helping you in the long run.
You should also avoid short term payday loans which we discussed in the past. These loans can be negative to your overall finances and further make you look like someone who has severely bad credit.
Avoid costly perks that will undo your hard work
Once you do receive your loan (whether it be a home loan or personal loan) – be sure to avoid facilities that often come with loans that can get you further into debt.
This includes things like redraw facilities (letting you redraw your money easily), linked credit cards (allowing you to spend more money on your loan easily) and line of equity credit (loans that are secured by your home or similar).
Also avoid taking a bad deal simply because you need the money. A bad deal will always be a bad deal and there are many options to explore with many lenders before agreeing to an excessive interest rate or loan with over the top fees.
Final tips for people with bad credit looking for a loan
Loans for people with bad credit don’t always have to be a bad thing. Here are the final tips to take on your search:
- Attempt to fix your bad credit issues firstly.
- Don’t immediately resort to specialist bad credit loan providers.
- Look at non bank lenders, there are quite a few to choose from.
- Remember that all providers are different – so don’t stop looking if one says no.
- Be honest with lenders.
- Prepare to answer questions about your past. Give good responses.