Can I get finance if I have a bad credit score?
With a recent report stating that almost 1 in 4 people in Australia having some form of an adverse listing on their credit report, it’s not surprising that we are commonly asked if someone can get approved for finance with a bad credit history. So, if this is something you have wondered lately, you are not alone.
Well, I am delighted to be able to let you know that, if for whatever reason you have a bad credit score, it’s not the end of the road when it comes to getting approved for finance.
In this article I am going to shed some light on what options you have for obtaining finance, even if the information in your credit report is impacting your credit score.
Can I get a home loan with bad credit in Australia? The simple answer is Yes. However, it’s important to know that although you may be able to get approved for finance, there are several things that you need to understand about your finance options when you have bad credit.
For starters, while it is certainly possible, it’s a lot harder to get approved for finance when you have a bad credit score. Below is a list of some of the other impacts of obtaining finance with a bad credit score.
- There are less lenders willing to work with you than if you have a good credit score
- Expect to pay a higher interest rate than you would if you had a good credit score.
- Expect to pay higher fees than you would if you had a good credit score.
- Expect to pay Lenders Mortgage Insurance.
However, there are situations and lenders where you may struggle to get approved for finance.
When are you less likely to be approved finance?
In Australia, a credit provider is governed by strict rules and regulations. One of these is the Responsible Lending Regulatory Guide. The Responsible Lending Guide outlines the obligations a credit provider, such as a bank, must follow before they approve your finance. These responsible lending obligations are designed to ensure that lenders do not suggest or encourage you to enter into unsuitable credit arrangements that you may be incapable of paying back based on your financial situation.
When you apply for finance, you sign that you have read and understood the Terms and Conditions. But let’s be honest no one really reads or pays much attention to the small print before signing on the dotted line. However, one thing that many people don’t realise is that it’s common for one of those terms and conditions be that the credit provider has permission to do a credit check on you before approving your finance.
Your credit report provides a summary of your recent relationships with other creditors. It acts as a kind of report card and allows a pending credit provider to get an understanding of your history of managing and repaying debt. The information in your credit report is used to calculate your credit score (for more information on your credit score check out this blog – insert link to previous blog).
Often a pending credit provider will initially do a quick check of your credit score. If your credit score is below average this indicates there is a problem with your credit history. The credit provider will then check your actual credit report.
Adverse information on your credit report, such as a default or numerous credit enquiries indicates that you are likely to struggle to repay debt and it’s at this point that major banks and lenders will more than likely decline your credit application. This may be because of their tight lending criteria or their own risk profile and internal policies or simply an automatic decline based solely on credit score.
However, all is not lost, as recently we have seen a rise in lenders offering products designed for people with poor credit (often called non-conforming specialist lenders).
This week FBC’s own James Kaiwai interviewed Steven Emms from Speaking Finance, who explained non-conforming finance and how it works. Learn more here [ CK ask fil to edit the video around the non conforming part]
Unlike many of the major banks, a non-conforming lender is more likely to carefully assess your loan application on a case-by-case basis, taking into account the specific circumstances that led to the adverse listing being made on your credit report. They will also consider how helping you obtain the new loan will put you in a better financial situation long term.
If you have a bad credit history or if your credit score is less than desirable, the other aspects of your application will be reviewed to provide more weighting for the risk assessment process of approving your application. These factors may include your current income, expenses, length and stability of employment, how much you want to borrow and how much deposit you have managed to save.
Whilst non-conforming loans are popular for home loans, they are also available in most fields of finance including vehicles, asset equipment, and commercial finance.
So yes, you can get finance with a bad credit score, but there is a cost.
Please remember the life of a home loan spans 25 or 30 years, therefore even a slightly higher interest rate can add up making a big difference on the overall cost.
Below is an example of how big the difference in interest rates can be in terms of what you need to repay over the lifetime of your loan. This does not include any additional fees or the costs of Lenders Mortgage Insurance.
As well, if you’ve found it difficult to manage smaller loans in the past, taking out a big loan may be biting off more than you can chew and if you fall behind in your repayments or even default on the loan, your credit score will only get worse.
And in the event that your loan application is rejected, this can also cause several problems. First is that you may forfeit your application fee and your credit score will also be negatively impacted.
Bad credit loans are usually used as a short- to medium-term fix, rather than a long-term solution. Usually, a borrower accepts a higher interest bad credit loan with the intent of refinancing to a standard loan with a major lender when their credit history has been cleared of adverse information and their credit score has improved.
So, in summary, getting a loan with a bad credit brings with it a few more challenges that require consideration, but it’s certainly not impossible. If you have a bad credit history, it’s important to carefully consider whether applying for a loan is the most prudent thing for you to do.
Due to the higher costs you are exposed to with these types of loans, it’s even more important to carefully research fees, interest rates, contract terms and risks before you apply for one.
The team at Fix Bad Credit can help by reviewing your credit report for free. We can then advise if we can help you by potentially removing the negative information from your credit report – giving you access to a standard loan, which you can tell by the example above may be the best investment you can make for your financial freedom.
Alternatively, we can assist with your due diligence providing you with options that suit your specific circumstances and getting you in touch with our non-conforming credit specialists like Steven and the team at Speaking Finance.
Get in touch, it won’t cost you a cent.