Navigating Personal Loans with Bad Credit: What Are Your Options?

Credit scores count for everything in the world of personal finance. If your score is low, it’ll be difficult to acquire low rates on personal loans, and you may be refused outright.

It’s not all bad news, though. There are bad credit personal loans available, and you also have a few other options to make yourself a more viable borrower.

Improve Your Credit Score

Okay, we know what you’re thinking, “It’s easier said than done”. And if you’re here looking for bad credit options, you’ve probably already checked your credit score and considered your options.

But making positive changes is easier than you might think. Here are a few ways to improve your score:

• Get a secured credit card: A secured credit card works just like a typical credit card, but instead of tapping into a pre-determined unsecured limit, the payments are set against a cash deposit. It’s your money and there’s no real credit, but every time you make a payment, it shows a positive mark on your credit report.
• Don’t apply for too many new accounts: If you’re desperate for cash, you might be making a lot of account applications. But this has a massively negative effect on your credit score. So, keep those searches to a minimum and be wary of any lender that tells you they will perform a “hard credit check”. These checks will reduce your credit score.
• Pay on time: Credit history is one of the biggest factors in determining your credit score. Meeting your payment obligations won’t have much of an impact on your credit score in the short term, but it stops it from heading in the other direction. Furthermore, when enough time has passed, your score will begin to climb. 
• Pay down debt: It’s not all or nothing when it comes to debt. Your credit score focuses on something known as credit utilisation or debt-to-income ratio. In other words, the higher your debt is compared to your total credit, the lower this part of your score will be. Focus on clearing high-interest debt first, including unsecured loans and lines of credit.
• Keep your credit cards: If you clear a credit card, keep it open. Having an unused limit helps to maintain a high debt-to-income ratio, which accounts for a sizeable percentage of your credit score.

Get a Smaller Loan

Lenders are more willing to take risks with smaller amounts. If you reduce the size of the loan, they should be a little more receptive. Of course, it means the loan might not be enough to satisfy your needs, so you’ll need to look for alternative funding options.

Ask friends and family members, sell unwanted assets and luxury goods, and tap into your savings account. It’s a nuisance, but it’s a viable option, and in the meantime, you can work on fixing your credit.

Get a Loan Guarantor

If personal loan lenders lack confidence in your financial ability, get a guarantor to stand in for you. A guarantor assumes responsibility for a debt if you fail to meet the repayment terms, thus providing the lender with some security.

Guarantors are often friends and family members. They can be anyone who knows you well and trusts you sufficiently. Needlessly to say, they must have a good credit score and solid financial standing.

It’s a big responsibility, so don’t make them feel obligated and be understanding if they refuse.

Provide Some Collateral

Secured loans are loans backed by valuable assets. A mortgage is a secured loan, as it is secured against the property. Car loans and other personal loans can also be secured.

Securing the loan provides some collateral and gives the lender a way to cover their funds if you fail to make the repayments. If you take out a secured loan against your car and stop making payments, for instance, the lender will repossess the car and sell it at auction to recover some or all the money.

Lenders are usually more willing to provide secured loans. You will also get a more favourable interest rate.

Get a Bad Credit Loan

As the name suggests, bad credit loans are personal loans for borrowers with bad credit. They work a lot like the personal loans for which you may have been refused, but there are some key differences:

• The borrowing limit is lower.
• The interest rates may be a little higher.

Bad credit loans are provided by specialist borrowers and while you don’t need a good credit score, you do need a stable income.

Need more help finding a suitable bad credit loan? Contact one of our lending specialists to ensure you understand the small print and get the best possible rates.

Alternatives to Personal Loans

Payday loans, also known as “small-amount loans”, are an option if you don’t need a lot of money. But these loans have short repayment terms and very high-interest rates, so they shouldn’t be near the top of your list.

The No Interest Loan Scheme (NILS) is a better alternative if you need a small sum of money very quickly. NILS offers small personal loans to low-income borrowers who meet specific criteria. You must have an annual income under $70,000 or a household income of less than $100,000. It’s also available to borrowers who have experienced domestic violence in the last decade or have a Health Care Card/Pension Card.

Borrowers must use the money for a listed purpose (including beds, mattresses, household appliances, council rates, and certain home repairs) and show that they can repay the balance. There are no fees or interest charges.

Peer-to-peer lending platforms might be viable for some borrowers, but the rates/fees can be high, and many consumers prefer to work with major banks and financial institutions.

Bad Credit Loans and Alternative Funding

It has never been easier to obtain credit. Having a bad credit score can complicate matters somewhat, but as the above guide shows, there are still options out there for borrowers who don’t meet the minimum credit score requirements on traditional loans.

So, remember:

• Improve your debt-to-income ratio and build a strong payment history to fix your credit score.
• Apply for a smaller loan amount.
• Ask a close friend or family member to be a guarantor.
• Apply for a bad credit loan.
• Look into peer-to-peer lending.
• Check out NILS funding.

Contact one of the lending specialists at Ume Loans for more assistance. We can help bad credit borrowers secure the best personal loans for their needs.