How to get a personal loan with an average credit rating

Most of us aim for a good–to–excellent credit score so that we can access loans and credit cards easier, as well as cheaper utility bills and phone contracts.

Not all of us have a flawless credit file, though, because lots of us miss the odd payment here and there, while some of us get into difficulty with our personal finance and have more serious blots on our files. Mostly, though, we have average credit ratings because most of us are average. Not too good, not too bad. Functional. You can get a mobile contract easily and your home loan terms are OK…

Occasionally, though, you may need something more. If you’re really sick of seeing those old kitchen cabinets, or you decide it’s finally time to move home then a loan will help you to get things done all the sooner.

So, what’s the reality? 

You might believe that if you only have a so-so credit score that you won’t be able to apply for a personal loan, or you’ll have to accept high interest rates. However, times have changed and with the growth of alternative lenders, personal loans for bad credit aren’t that unusual now. This means that if you have an average credit score Australia still has lenders out there who can help you.

You may face slightly higher interest rates, because anything other than a good–to–excellent score is seen as a higher risk to lenders. Self–employed people are sometimes seen as slightly riskier and so can have higher interest rates applied to any credit they’re offered.

What constitutes an average credit score?

Your credit score is a rating between 0 and either 1,000 or 1,200 (depending on the credit reporting bureau you use) that is then placed somewhere on a five–point scale that runs from “weak”, through “below average”, “average”, “good” and “excellent”.

The credit reporting agencies take the information on your file to formulate your score. This information includes how much credit you’ve had in the past, how you’ve handled it, whether you have lots of missed payments, defaults, whether you have a seemingly permanent overdraft and so on. They also look at positive listings like paying your bills and debts on time.

The average credit score is between 500 and 600 and, when it comes to looking at your riskiness, a score like this means you have a one in 12 chance of having a new negative listing on your credit file within the next 12 months.

Look for your most favourable terms

Anything over 800 or so is considered excellent and means you’ll qualify for the best personal loan rates available. If your score is average to good and you want a personal loan apply to lenders with the most suitable rates and terms for you. By paying this loan off in a timely manner, you will help to improve your rating.

What sort of personal loans should I look for?

You can look for unsecured personal loans

You can apply for unsecured loans with an average credit rating, but be prepared for higher interest rates than you’d get if you were using an asset as collateral. You can always nominate a guarantor if you think this will improve your chances of approval. Looking for personal loans online is a good idea here, as you can compare them side–by–side to look for the ones with the best terms for you.

You might try peer–to–peer lenders

P2P loans involve third–party lenders who match up private investors with borrowers. You won’t have a one–to–one relationship with your lender as you would normally; instead your investor–lenders will finance your loan as part of their portfolios. Just as with regular loans, however, your interest rate—which is essentially the investors’ returns—will be determined by your risk rating.

P2P lenders like RateSetter and SocietyOne base your loan interest rate on your credit rating.

Car loans are also very possible

A personal car loan is different from a purely personal loan because it’s secured by the car itself. Still, when your credit score is average, you’ll pay more interest than someone with a good–to–excellent rating.

What sort of interest rates should I expect?

If your score is average, then you might see a range of interest rates, rather than an unequivocal set rate. This is because you’re a higher risk, but you might not be too risky. The highest and lowest rates are bound by acceptability and fairness, so they tend to have narrower banding, whereas people in the middle have more of a range.

When you’re comparing personal loans, look for ranges with upper limits that you still feel comfortable with. The chances are that your eventual rate will be in the middle of the banding anyway. If you worry that you might be near the top of the range, then you should apply for a smaller amount if possible. Don’t forget that the length of your loan and your employment history also count. It might be an idea to commit to a shorter payback period if you’re worried about the amount of interest you’ll end up paying.

Comparing personal loans with an average credit rating

This can be more difficult because you won’t know what your rate will be with any one lender until they respond. The best thing to do is assume you’ll be nearer the top end, work from there and hope for a pleasant surprise.

You should also factor in establishment fees, as well as ongoing and early repayment fees. These add to the eventual cost of your loan so if you can find loans with smaller costs, go for it.

Should you consider a credit card instead?

Having a credit card will give you the immediate funding, but you’ll almost certainly have significantly higher interest rates than with your loan. In addition to this, a credit card is a revolving debt, whereas a loan has a definite structure and end point.

Compare unsecured or secured personal loans, car loans, bank account overdrafts or loans for debt consolidation purposes at InfoChoice.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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