Trying to get a loan with bad credit can feel like a difficult task, and it’s easy to feel disheartened by the process before you’ve even begun.
Luckily, there are avenues available.
Let’s look at some ways you can potentially secure a loan and make an informed decision that will help you achieve your financial goals – regardless of your credit score.
Can I Get a Home Loan with a Bad Credit Score?
Yes, taking out a home loan in Australia is possible when you have a bad credit rating, but it might be challenging.
In accordance with the National Consumer Protection Act 2009, Australian lenders have a legal requirement to lend responsibly by providing loans suitable for borrowers that won’t put them in a state of mortgage distress. As such, lenders must make reasonable inquiries regarding the circumstances of loan applicants, including financial verification. They must avoid offering home or personal loans to candidates without sufficient proof they can meet their mortgage repayments.
The purpose of this is to avoid leaving consumers in any financial strife, where they aren’t able to pay off their monthly repayments.
Lenders perform credit checks as part of the pre-approval process when a borrower applies for a loan. If you have bad credit, you’re more likely to set off alarm bells as someone unable to meet their obligations.
The credit score isn’t the only thing they’ll consider, either. Factors like employment, income, general expenses, outstanding debts and deposits will also impact the success of loan applications.
What is My Credit History and Score?
A credit score and history starts once we apply for a credit product like a credit card, personal loan or even mobile phone plan. This record is reviewed with each credit product application to help lenders decide.
Credit histories include your repayment history, any defaults on repayments or bills, past and present credit products, as well as your credit rating.
A credit rating (also known as a credit score) is a scale ranging from ‘below average’ to ‘excellent’. Different credit agencies have various ways to calculate a credit score, so the agency you use to locate your credit score will help you understand where you sit on the scale.
Regardless of the agency you use, having an ‘adverse event’ on your report means there have been previous instances of negative reports or transactions, like overdue accounts, unpaid debts, dishonoured payments or transactions that have surpassed your credit limit.
While these events don’t automatically disqualify you for a home loan, they can make it more challenging to gain approval than someone with a good credit history.
How Can I Make My Credit Score Better?
A bad credit score isn’t permanent and can improve with a selection of positive actions. In fact, working to fix your score is one of the best ways to see success with your loan application. Unfortunately, while there are things you can do to improve your score, there isn’t an overnight fix. Make efforts to:
1. Know your current credit score
Finding out where you’re starting from can give you a more realistic timeline to reach your financial goals.
There are several ways to get a copy of your credit report, but some of the most commonly used methods are:
Some credit agencies allow you to access your credit file and score for free, and signing up for an account can be a great way to keep tabs on your progress.
2. Double-check your report and history for any mistakes or errors
It’s certainly not common for credit histories and reports to contain incorrect information, but it can happen.
Errors can include anything from a typo in your name to an incorrect credit amount, or even someone else’s debt listed in your file – for example, a family member with a similar name to yours.
If you’ve noticed you’re being set with a bad credit history due to a potential mistake, you can contact the credit provider to request a correction. Make sure you have any necessary proof or documents to help prove this is a mistake.
To avoid future errors, check your history and credit report regularly.
3. Be wise with credit card usage
You don’t need to completely avoid using credit cards, even if you’ve got a bad credit score.
Showing potential lenders that you can use a credit card sensibly and make the repayments on time can help them see evidence of your capacity for debt management.
4. Pay your bills on time
On top of any credit cards and personal loan repayments you might have, it’s also crucial to pay the rest of your bills on time.
While payments for your utilities and other services aren’t included in your history, paying them on time is another way to highlight good financial skills.
Plus, if you do fall behind on bills and other payments, you may be referred to a debt collector to retrieve overdue payments. This will impact good credit ratings and make it harder to get approved.
5. Avoid frequent employment changes
Lenders like predictability. It allows them to accurately forecast who makes a good borrower (and who doesn’t).
So, while it’s acceptable to change employment if you’ve got a new opportunity, a new career pathway or just feel like a change, make sure you’re not doing it too often.
Frequently changing your employment can cause lenders to see you as a higher risk, indicating an inability to maintain employment for a stable period of time.
What are My Loan Options if I Have Bad Credit?
If you’re looking for a loan and have a bad credit rating, you can still consider a few options to get approval.
A bad credit loan is a common way for those with bad credit to get finance. People with a low credit score or minimal credit history can also benefit from them.
Traditional financial institutions like banks or credit unions may not provide bad credit loans, but plenty of specialist lenders still offer them.
Various types of bad credit loans can be used for various purposes, like paying off debt or making large purchases. Some common options include:
- Bad credit debt consolidation
- No credit check loans
- Bad credit personal loans
- Business loans
- Home loans
- Bad credit car loans
- Bad credit cash loan
However, when you’re applying for a bad credit loan, there are a few red flags for which you should watch out.
Consumers with bad credit history can be an area that scammers and opportunists readily target, so avoid any lenders that:
- Fail to ask about your credit history
- Need you to put down a security amount to secure the loan
- Have no online presence like a website or consumer reviews
Finding the right lender for your bad credit loan puts you one step closer to approval, particularly if they’re an established lender who specialises in helping borrowers with poor credit history.
But as with any financial decision, there are some considerations before you sign onto a bad credit loan.
Lenders who offer these types of credit loans are taking on higher levels of risk, so the interest rate is typically much higher.
Depending on the lender you decide to use, they might add additional fees to your borrowing costs. These can include early payout fees or an origination fee, which is an upfront cost at the beginning of the loan process.
Everyone deserves a chance at achieving their financial goals, even if they don’t have a strong credit history.
There are things you can do to improve your bad credit and gain a healthier credit history, but sometimes the most effective thing to do is to have patience and hold off on getting a loan until your financial situation improves.
Whatever your decision, The Mortgage Agency can help you secure a suitable home loan that fits your financial circumstances.
Contact one of our experienced mortgage brokers for the best knowledge, education and guidance you need to take your next step.