Getting a personal loan with bad credit can feel like a challenge. Most of us have heard “no” when looking for a loan for something we thought was within our budget. You may even have heard “no” when buying your home or car!
Banks and other financial institutions are hard to deal with, and sometimes you end up getting nowhere when you need to get a loan. But, there are ways to get around the “no” answer responsibly, and it’s all in how you go about your search.
Here are some tips and tricks that you can use to get approved for a personal loan if you’ve got bad credit.
What is a credit score?
A good starting point is to know what a credit score is, and how to get access to yours. A credit check measures your ability to repay your debt, this is calculated by Credit Bureaus or credit checking companies. In short, your score is what tells financial institutions whether you are capable of carrying credit.
The information in your report translates to a single score that basically rates your ability to repay debt. Your score usually ranges between 0 and 700+.
What is a bad credit score in South Africa?
There is always the good, the bad and the ugly when it comes to credit scores. A bad credit score is below 600 in South Africa, obviously dependent on each lender’s credit check criteria and credit bureaus scoring range. This is a score that is considered to be damaged and makes it difficult to qualify for a loan.
Bad credit can occur when a person has made late payments on their credit card or they took out a loan and they have not paid it back. If you have a bad score, it does not mean that you cannot get a loan. It just means that it will be more difficult for you to get a loan. There are a few options that you can use to help you improve your score and get a better loan, which we will get to further down.
5 things that cause a bad credit score for personal loans
- Late payments – it’s never good to come late to the party, especially when it’s time to pay back the money. Paying off your accounts consistently late will hurt your credit score drastically.
- Failing to pay at all – every time you don’t pay off your accounts at all, you could get written off completely (meaning have accounts closed)
- Defaulting on loans – your loan default is similar to missing a credit card payment, each month you don’t pay it off it will be marked as a default.
- Having your home foreclosed – the last thing you want to do is get behind paying off your home loan, as this can lead to foreclosure. This will also prevent you from getting future home loan approval.
- Maxed out credit cards – trigger happy online shopping is an easy trap to fall into, but also an easy way to hurt your credit score.
5 tips on how to get a personal loan with bad credit
1. Improve your score (if you can)
We know you may have exhausted all your options. But this really is a great way to get a better personal loan offer and interest rate. Enrol in our credit health course, where we will walk you through all of the steps involved in improving your credit score.
2. Shop around
Do the research yourself and have a look at which banks offer personal loans for bad credit. Better yet, use a platform like Fincheck, which will match you with the most suitable lender based on your credit score.
3. Find someone to co-sign
If your family, business partner or spouse has a good credit score, ask them to co-sign on a loan with you. Obviously, this makes it much riskier as they are legally responsible as well, but you are more likely to get loan approval.
4. Use your business lenders
If your business has already taken out a loan using a specific lender, you want to leverage this good relationship. The lender will likely be more lenient on a bad credit score if you’ve established that relationship.
5. Explore alternatives
Look at credit cards with low APR (annual percentage rate)s. If you need money for once-off expenses a loan might not be your best option, and credit cards for bad credit might be more realistic.
Which lenders offer loans for bad credit scores?
It’s best to set the record straight first – you’ll likely receive limited personal loan offers if you have a bad credit score. If you have gone through all of the tips above, without any luck, there are a few lenders in South Africa that offer loans for below-average credit scores. Here are a few options:
What interest rates will I get if I have bad credit?
Simply put, a high score means you’ll likely get a lower interest rate and a low score means you’ll have a higher interest rate. The interest rate itself can vary with each lender and their specified criteria. This is can depend not only on your credit score but your employment history, your assets, spending habits, and your actual historical credit record.
Frequently Asked Questions for people with a bad or low credit score who need a loan
How can I improve my credit score?
Managing and maintaining a healthy score is vital in improving your overall credit health. There are many small changes you can make in your life to help improve your credit score. A few of these include: regularly checking your score, staying on top of payments and reducing your credit balance if you are reaching your limit. Going through each of the steps will get you one step closer to a great credit score.
If I take out another personal loan how will it affect my credit score?
Once you’ve enquired about taking out a personal loan, this hard enquiry can usually negatively impact your credit score for a couple of months. This is mainly because the lender is busy assessing your credit score and your spending habits to see if your loan application can be approved. However, if you pay your loan back on time each month you’ll slowly but steadily improve your score. On the contrary, if you have an average credit score, and take out another personal loan your credit score can decrease even further. This can result in not being able to take out future loans or credit cards.
Can you get a loan if you have a 500 – 580 credit score?
A credit score of 500 is considered bad, which means it’s more difficult to get a loan. Don’t stress though, there are plenty of ways you can improve your credit score. As well as that, there are a few lenders who will give you a loan with a bad credit score, you’ll just likely just have to pay higher interest rates.
Which loan is best for bad credit?
Secured loans are probably your best bet. This type of loan minimises the risk posed by your credit score by backing it with an asset, this asset adds a layer of assurance. A secured loan is a lot easier to get with bad credit as you’ll be less risky for the lender. In addition, your interest rates won’t be as high, which is definitely helpful if you are already in the bad credit zone.
Unsecured vs Secured Loan
These two types of loans are very important to differentiate between as they will directly affect your interest rate. A secured loan is when a lender will accept your asset as collateral, this means it’s less risky for the lender and more likely that you’ll pay back the loan. It’s a win-win for both parties, the lender is in a safer position and the borrower received a more affordable interest rate. However, it is riskier for the borrower because if you fail to repay the loan you could end up losing your house or car.
An unsecured loan, in contrast, does not have any assets tied to it. This type of loan is much riskier for the lender, and with this increased risk comes increased interest rates. An unsecured loan is ideal when you have an emergency expense you’d like to cover, and don’t want to use your property or car to back it.
And that’s it…
If you want to get a personal loan, but your score is less than perfect, don’t give up! There are lenders who specialize in approving loans for people with bad credit, and they are a great way to get the money you need when you’ve got nowhere to turn. They don’t want to turn you down; they want to help you. The next step is applying for a personal loan, and we’ve got your back with lenders who can assist you.