You may be able to get a loan with a low credit score if you work with a lender that doesn’t require good credit, or if you can qualify based on other criteria. While your credit score can be an important factor in getting a loan, lenders may also consider your income, debts, collateral, and credit history.
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What is a credit score?
Your credit score is a three-digit number that is calculated based on your credit reports. It is an indication of your history with credit and will show lenders how responsible you are with debt.
Credit scores can range from 300-579: poor, 580-669: fair, 670-739: good, 740-799: very good, and 800-850: excellent. The higher your credit score, the lower risk you are to lenders as opposed to low credit scores with more risk.
Read: Can debt be a good thing
What is bad credit?
If you have bad credit it means you’ve probably struggled to pay back your debts and a mark has been left on your report by a lender. This might be for a number of reasons, for example:
- You haven’t made the monthly repayments on time
- You’ve missed the repayments altogether
- You’ve been declared bankrupt
- You’ve had a court judgment against you
How is a credit score calculated?
A credit score is calculated using information contained in your credit report, including account information, payment history, and public records and inquiries (as well as requests from other credit providers to view your credit record.) Your score is a summary of positive and negative factors that determines whether or not you’re likely to honour future credit agreements.
How Does Bad Credit Affect Your Ability to Get a Loan?
People with bad credit tend to have negative marks on their credit reports, such as late payments or accounts that are past due or in collections. The resulting low credit score tells a lender that the person is more likely to miss a loan payment in the future, which could cost the lender money.
What credit score do you need to qualify for a personal loan?
Each lender requires different minimum credit scores, but on average the best credit score to have is between 600 – 700. A higher score means you are less of a risk to lenders, and more likely to qualify. A credit score of over 800 is excellent and will have the best competitive interest rates and allow you the freedom of choosing your loan terms.
There are personal loans specifically designed for people with poor credit histories. Lenders offering these types of loans tend to charge higher rates of interest because they’re taking on a bigger risk with the people they’re lending to. These lenders will consider your income and ability to repay your loan when considering your application.
Read: Need a personal loan?
How to get a credit report
Before you apply for a loan, assess your credit and financial situation. Your credit report can help understand what you would need to do and how to increase your credit score. South Africans are entitled to one free credit report from any of these credit bureaus; TransUnion, Compuscan, Experian, and XDS (Xpert Decision Systems).
ClearScore offers users access to their credit score and reports for free, forever
What other options do I have if I can’t qualify for a loan with a low credit score?
Firstly, don’t keep applying for more credit – all credit applications you make (whether successful or not) do show up on your credit report.
Making many applications over a short period of time may hurt your chances as you can appear desperate for credit to lenders, as you may not have enough money to repay all the loans you may currently have.
Read: Why you need an emergency fund
If you’re looking for a loan or need extra cash, why not look at some alternative options instead?
- Develop a robust saving strategy
- Create a secondary income stream
- Find ways to improve your score before applying for credit again
- Ask a creditworthy friend or relative to cosign on a loan, which could increase your chances of qualifying
- Apply for a same-day loan but these may come with very high-interest rates.
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How to improve your credit score before applying for a loan
Unfortunately, the best loan rates and offers will only be given to people with high credit scores. The good news is that you can start to build up your credit score at any time to get yourself on the right path to a cheaper loan.
- Pay your accounts on time and in full wherever possible. Avoid paying minimum amounts towards your debts.
- Only use credit where you need to, without reaching your credit limits.
- Keep your credit card debt as low as possible as they have the highest interest rates and will hold you back from keeping your balances low.
- Avoid owing more than 30% of your income on debt.
- Make arrangements with lenders if you find yourself unable to pay back your debts.
Read: Things to lookout: Personal Loan
It’s possible to get a personal loan even if you have bad credit. However, you must shop around to find the best options.
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Prepare your credit score ahead of time if you plan on taking a personal loan out. Keeping to a payment schedule and not overusing your credit will help you achieve a credit score above 600 to qualify for your application.
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