Can I get a personal loan if I have bad credit?

While having bad credit will never work in your favour, it does not necessarily mean you are ineligible for a personal loan. There are plenty of loans available to people with bad credit or marks on their credit history - things might just look a little different.

Let’s get started with a few key questions:

What is a credit history? What is a credit score? What is a credit report?

Credit can be confusing to understand, because there are a lot of terms to understand.

Essentially, your credit history is your history of being creditworthy - your track record of paying debts and being in good stead with lenders. This is recorded in multiple ways.

The first is a credit report, which is a comprehensive record of your credit history and contains detail. The second is your credit score. This is a number between 0 and 1000 (or sometimes 1200, depending on the credit report), and is a quicker summary of your creditworthiness where a higher number indicates better credit.

When applying for a loan or credit card, the lender will check your credit score to determine how reliable a borrower you are based on your rating. So, having bad credit can be a red flag for lenders.

What is a bad credit score?

If you've had a credit check, locate your score on this table to see where you sit on the credit scale. Each agency has their own credit reporting scale, but as a general guideline, this should help!

If you've had your credit checked and found yourself coming up short, never fear. Keep reading to find out what to do when it comes to borrowing money when you have bad credit.

What kind of personal loan can I qualify for if I have bad credit?

It may be more challenging to qualify for a personal loan if you have a poor credit history than an applicant with stellar credit.

You also might find yourself offered a significantly higher interest rate and fees than someone with a good credit score would. This is because many lenders use a risk-based pricing model, and borrowers with worse credit represent more risk to a lender than a borrower with a good credit history. This pricing usually works in tiers, with lower rates on the tiers for borrowers with better credit.

It is also important to keep in mind that lenders may require more intense application processes and financial verification procedures for applicants with poor credit. This is to ensure that you can handle the loan repayments. 

You may also find that if you have bad credit, you might be required to provide security for a loan. You may be subject to additional restrictions on how much you can borrow.

If these things do not sound appealing to you, you can do some serious work to improve your credit score. This is not easy, but it can earn you a better rate on a loan and may make the loans process feel smoother with less restrictions.

What about payday loans?

There are some types of online loans that may not require credit checks and offer instant money transfers, known as payday loans. Payday loans may also be known as small amount loans, and allow you to borrow up to $2,000.

Mozo does not endorse these types of loans as they are potentially very risky due to their high interest rates.

Find out more about all types of loans available to apply online at the Mozo online loan hub.

How can I get a good personal loan with bad credit?

As it can be extremely difficult to be approved for a good interest rate personal loan with bad credit, the best approach is often to try and improve your credit score.

Otherwise, you may find yourself faced with much higher interest rates or restrictive access to loans - only able to to access secured loans or loans with low borrowing limits. Find out the difference between secured and unsecured loans to see if this will suit your needs. 

How can I fix my bad credit score?

Improving your credit score is not an overnight process, but it is extremely worthwhile. Not only will a better credit score improve the personal loans on offer, but it will also help in any potential future applications for borrowing products (like credit cards or home loans).

The first step is to get a copy of your credit report from one of the main credit reporting bodies in Australia, such as Equifax or Experian. Then, check your report for errors or possible identity fraud, as you do not want to be blindsided by inaccurate information during a credit check.

Once you have combed through your report, it’s time to get your finances in order. You will need to pay off any outstanding debts. Any bills that have gone into default will be listed on your report for five years, but will be marked as paid when you pay them. So, although defaulted bills are still a mark against you, they’re better paid late than not at all. You also should try to set up direct debit payment systems to prevent any further late payments.

Finally, limit your credit applications. Each time you do, a lender does a ‘hard enquiry’, which goes onto your credit report. Too many hard enquiries will negatively affect your credit rating.

To learn more about improving your credit history before applying for a personal loan, check out Mozo’s step-by-step guide to improving your credit.

What is the best loan for bad credit?

There is no one loan that will answer this question, as the best loan will depend on your personal and financial circumstances. Compare loans using Mozo's personal loan comparison calculator to help work out which loan suits you best. This will help you work out your repayments and interest in order to find a loan you are confident with.

It's important that you stay on top of your loan repayments, as any slip ups may further damage your credit score.

If you do need more help in terms of financial hardship, there are places to turn - instead of opting for loans that may put you into deeper debt. While there are low income personal loan options, you may also want to look to Moneysmart's options for free financial counselling or contact the National debt helpline.

Before taking out a personal loan, it is critical to do your research and learn what is going to work best for your situation. Start by checking out Mozo’s personal loan hub for more information.