What do lenders look for in a borrower?
To secure a personal loan, you must demonstrate that you can repay the loan and that you can manage your finances responsibly. Lenders will consider a variety of factors to get an indication of your profile as a borrower. These may include:
- Your income
- Your payment history and patterns when bills come due
- Your savings habits
- How often your wages are paid to you
- Your level of debt
- Your credit rating/record/score.
Your credit rating is derived from your credit report and credit file. The credit report records defaults on payments or bills due. A default occurs when the payment is overdue for more than 30 days and the lender attempted to recover the payment. Even if the amount owing is paid, it is worth noting that a default can remain on the credit report for five years. The credit file shows your borrowing and payments pattern i.e. how promptly you make payments on loans or bills. Making payments on time will ensure a clean credit record.
What is bad credit and why is your credit rating important?
A credit rating paints the lender a picture of borrowing behaviour. If a good credit rating demonstrates the borrower pays their bills on time, a bad credit rating will indicate the opposite. A bad credit rating may arise from the following situations:
- Missed payments
- Defaults on payments
- Other factors indicating financial unreliability
So the credit rating is very telling and extremely important to prospective lenders. A borrower with a bad credit rating is seen as a risky customer for the lender. The risk aspect relates to whether the lender will recuperate their loan. Some lenders may be reluctant to offer loans due to concerns surrounding the borrower’s ability to repay the loan.
However obtaining finance is not impossible with a bad credit rating. In New Zealand, there are a wide range of lenders with varying appetites for risk. A bad credit rating may limit your choices, but it does not entirely exclude you from the market.
Getting a personal loan with bad credit
If you are looking for finance and have a bad credit history, your choices will be limited, but it is still possible! The most likely option available to you will be a bad credit personal loan – a loan specifically tailored for borrowers with bad credit ratings. The terms of bad credit personal loans, such as interest rates, fees and duration, will depend on the degree of risk your credit rating implies.
In general, the interest rate on the loans available to you will be higher than those on loans offered to those with good credit ratings. Bad credit personal loans will more commonly be secured, as opposed to unsecured.
A secured loan provides collateral to the lender. The loan is secured against an asset capable of possession by the lender in the event of default. This can act to partially offset the potential risk posed by a bad credit rating. An unsecured loan is based solely on the borrower’s creditworthiness in the eyes of the lender. The loan is not secured by collateral. It is not, for these reasons, a common avenue for bad credit personal loans.
Overall, obtaining financing with a bad credit history is possible, if you are willing to accept conditions such as a higher interest rate on the loan, or providing security over an asset. An advantage of taking out a bad credit personal loan is that is gives you the opportunity to demonstrate characteristics of good credit criteria to improve your credit rating.
View personal loans available for borrowers with bad credit here.
How is credit info collected by the credit agencies?
The Credit Reporting companies receive reports from merchants and creditors you have made credit transactions with. Reports about transactions involving credit will include account information (the amount borrowed or credit limits on your accounts), as well as a monthly repayment history report which tracks whether your payments due are made on time.
For more information about your credit records visit the Citizens Advice Bureau website.
Things to remember when getting a personal loan with bad credit
Review your budget and be clear on how much you can afford to pay, for the loan, interest payments, and fees.
Research the different providers and note the finer details and conditions. The most important aspect is to understand what you are entering into.
Finally, it is important to remember that a bad credit rating does not have to be permanent! You can improve your credit rating by showing loan providers that you have good borrowing habits and financial management.