Quick guide: how to use short-term loans for bad credit
Credit score, also known as Credit rating, represents your reputation as a borrower. This number helps lenders determine your ‘risk profile,’ which impacts the amount of money they’ll lend, as well as the rate and terms. You can negotiate deals or know why a financial institution rejected you when you know your Credit score.
In general, the higher your score is, the more ‘credit-worthy’ you’ll be considered by lenders. This means you’ll have a higher chance of getting the loan approved, as well as be offered more competitive rates and terms.
Though what about when your credit isn’t as great? The good news is that non-bank lenders, specialist and private lenders have more flexible criteria and will often lend to borrowers with impaired credit. So, what are the ways to get short-term loans if you have a bad credit? Here’s an overview to get you started.
How to determine Credit score
A Credit score is based on an individual’s personal and financial information. Depending on the Credit bureau, the number is usually between 0 – 1,000, or 0 – 1,200. This score is typically on a five-point scale: excellent, very good, good, average and below average. A Credit score is also dynamic and can change from month to month as your financial circumstances change.
You can access your credit score and credit report from various credit reporting bureaus. Each bureau uses a slightly different algorithm to determine your score. They may also have different information about you, which can result in varying credit scores.
A credit score is calculated according to what’s in your credit report. The credit reporting agencies look at the following to understand your behaviour as a borrower:
- Credit history: This includes the presence of high-risk indicators, repayment history of your credit accounts, type of financial lending institutions you’ve submitted applications to.
- Previous credit applications: This includes the number of credit enquiries, number of loan applications you’ve made, amount and type of loan you have applied for in the past.
- Credit profile: This includes your age, duration of employment, age of credit history, credit cards, and current credit limit.
What does it mean to have bad Credit?
A bad Cedit score can limit your borrowing potential and make you less appealing to some lenders. This is because it suggests that you’re not financially stable and potentially high-risk. The lower your Credit score is, the higher your chances of being rejected for funding. You may also not be eligible for 0% interest credit cards or loans.
A bad Credit rating can result from many different factors, including late or skipped payments, defaults, numerous credit accounts and applications, serious credit infringements, or bankruptcy, a short Credit history, a lot of accumulated debts relative to your income – or any combination of any of these factors.
If you find out that you have a low credit score, you shouldn’t be discouraged. You can still take some steps to improve your score. Here are some areas to consider:
- Check your credit report. It may contain errors like incorrectly listed late payments. If you find one, discuss it with the credit reporting agency to ensure it’s resolved.
- Pay your bills on time. Late payments and defaults can negatively impact your credit score.
- Think carefully before applying for any new credit account. New accounts can lower your average account age.
- Manage your credit cards responsibly.
- Pay down any existing debts and loans.
- Get current and stay current with your missed payments.
- Seek the guidance of a financial counsellor, such as a financial planner or an accountant.
Information on your credit report remains for varying lengths of time, depending on what it relates to. Your repayment history information usually stays on file for two years, whilst overdue accounts, payment defaults, credit enquiries and court judgements often remain on your report for up to five years. Overdue accounts that are considered serious credit infringements can stay on your credit report for up to seven years.
Over time, the negative items will still be dropped off. Moreover, with the mandatory comprehensive credit reporting, positive behaviour like paying your bills on time is listed on your credit report. This can help improve your score over time.
Additionally, there are short-term loans or bad credit loans that you can apply for. Many specialist lenders, private lenders and fintechs offer products that can cater to individuals with limited credit history, who may have difficulty in getting approved for finance by traditional lenders.
The good thing is short-term loans in Australia allow people with poor credit ratings to borrow money without the usual judgment and denial from traditional institutions. Short-term loans require minima, or sometimes no documentation. With their reduced requirements, short-term loans often are charged with slightly higher interest rates to counterbalance the inherent risk of lending to those with impacted credit.
Ways to get a loan with bad Credit
Here are some steps to consider when looking for short-term loans if you have affected credit:
1. Check your credit score and credit report
Checking your credit score and credit report lets you know about any negative marks on your record. If there’s an error on your report, you can correct it before applying for a loan.
2. Shop around for potential lenders and the most suitable product
A low credit score can be a reason why borrowers may not qualify for cheaper loans that have longer terms. That said, don’t despair! You can still find a good deal. As you shop around, you’ll see that there are other options available that may have more flexible lending rates and standards.
Private lenders, specialist lenders and fintechs also offer a variety of short-term loans without the traditional qualification guidelines required by banks and traditional lending institutions. They are also flexible in their loan terms.
3. Do your research
Be sure to spend time researching the selected lender’s background to make sure they’re established and reputable. If it’s someone you don’t recognise, check out their reviews or if there’s any complaint made against them. A mortgage broker can help you with this process.
4. Borrow from the equity of your home
A lot of short-term loans will allow you to tap into the equity in your home as the basis for receiving funds for various purposes for personal or business use.
Short-term lenders can be a good alternative if you have a lower credit score or bad credit. There are many types of short-term lenders including non-bank lenders, specialist lenders, private lenders and fintechs. These lenders are less rigid in their requirements and are known to provide fast funding with flexible terms.