What are the Advantages of a Bad Credit Loan?

By Angela Monroe - October 22, 2019

A bad credit loan is your go-to financing option if you’re struggling to get approved for one because of bad credit history.

What is a Bad Credit Loan?

It is a personal loan designed for borrowers with bad credit history. It looks beyond your credit score to consider other aspects that suggest your financial capacity for repayment. These include a regular source of income, cosigner and collateral.


Aside from helping you get funds despite having a bad credit history, a bad credit loan provides several benefits, including:

High Approval Rate

Because your poor credit score and terrible credit history are not factored in by lenders when deciding to grant you the loan or not, you have a high chance of approval. As long as you have a good source of income and capable of paying back your debt, you’re likely to get the funds you need. 

While the approval for a bad credit loan application is high, your approval is not guaranteed. You can still get rejected if they think that you do not have the financial capacity for repayment.

Your financial capacity for repayment can be proven by your:

  • Latest income tax returns or proof of Centrelink pension or allowance
  • Most recent bank statements
  • List of assets like a real estate property
  • Records of paying for or receiving alimony or child support
  • Employment history, including salary and pay stubs
  • List of unsecured debts, including hospital bills and credit cards

While your credit records have no bearing on the approval or rejection of your loan, they still influence the terms and interest rate of your loan. Thus, the lender will run a credit check no matter what your credit standing and financial situation are.

Quick Access to Funds

A bad credit loan is generally provided by fintechs and online lenders. These companies take most of the process online. This makes the loan application easy and convenient and the approval rating high. Unlike borrowing from the bank, a bad credit loan from online lenders does not have complicated procedures even before your application is processed. Sometimes, banks and traditional lenders still reject your loan application even after taking all the necessary precautions, ultimately wasting a lot of your time and energy. 

Most of the time, you can get your money in as fast as 24 hours after submitting your application. This is very beneficial if you’re needing money for medical emergencies or natural disaster recovery.

However, the amount you can borrow is only limited to around 50,000 or less. You might be able to get a higher amount if your loan is secured against an asset than if it is unsecured. The latter may also charge an astronomically high interest rate.

No Collateral Needed

As mentioned above, you don’t need to pledge an asset as collateral for your bad credit loan. This is especially favourable if you have no properties to put on the line or simply doesn’t want to offer any collateral. 

Your collateral is a security for the loan, assuring the lender that their money won’t be lost in case of loan default. The lender can seize and sell your valuable properties if you cant pay off the debt within its agreed term to recover their money. 

The drawback is that, in the absence of collateral, it is highly for lenders to lend you money. To compensate, they will typically charge you an astronomically high interest for the loan.

Flexible Repayment Options

A bad credit lender can structure their loan offering to suit your needs and capacity for repayment. They may offer you the flexibility to choose the best loan term and repayment plan that allows you to strategically manage your debt and finances.

Loan Terms

The standard term of a bad credit loan is between 1 and 5 years, which is shorter than a conventional loan. If you’re taking a loan with a short term of 1 to 2 years, you can settle off your debt faster and save more on interest. A long term of 3 to 5 years, meanwhile, lowers down the amount of your monthly repayment, which is favourable if you’re making a low or average monthly income. Choose one that suits your financial situation and savings goals.

Frequency of Repayment

If your loan repayment plan is flexible, you can choose to pay the required amount weekly, fortnightly, monthly, quarterly or whatever frequency your lender allows. Weekly and fortnightly may be ideal if you’re receiving income from a regular job while monthly or quarterly is best if you’re running a business.

Down Payment and Balloon Payment

Additionally, you can provide a substantial down payment to reduce the total cost of your loan and to prove your commitment to repay the debt. If you’re financially struggling at present but are expecting to receive a large amount of money or making a big revenue at the end of your loan term, you can pay a balloon payment. This is a lump sum amount given at the end of a loan term after making small monthly repayments.

The repayment options of a bad credit loan differ from one lender to another. It is best to shop around for bad credit loans, compare terms and negotiate with lenders before finally taking out one.

Opportunity to Improve Your Credit

Taking out a bad credit loan is one of the most effective ways to fix your bad credit score. That is if you make your repayments on time and pay off your debt early or on its agreed end of the term. This is why a bad credit loan is also called a second chance loan.

As you responsibly attend to your loan repayments and effectively manage your debt and finances, your creditworthiness improves. In time, your credit score will rebound. Additionally, payment history is the biggest factor that influences your credit rating, accounting to 35% f your credit score. It is a no-brainer that if you want to fix your bad credit record, the first step if making timely payments on your active debts.

Bad Credit Loan: What to Watch Out For

Despite the many benefits of a bad credit loan, it can drive you deeper into debt if you’re not careful. 

Can You Afford the Repayment?

The interest rate of a bad credit loan is expectedly higher than standard loans to compensate for the high risk that lenders take in granting you the funds. This can significantly increase the total cost of your loan. The principal amount may be small, but can you afford the loan if the interest and associated fees are factored in?

To know how much you can afford, use an online loan calculator or get a quote from a prospective lender. These sources estimate your repayment capacity based on several factors, like:

  • Desired amount to borrow
  • Interest rate 
  • Loan Term
  • Repayment Frequency
  • Down Payment
  • Balloon Payment

You should also take a hard look at your income, expenses and savings goals to have an idea of what you can comfortably afford to spend.

Loan Predators

The desperate situation of many bad credit loan applicants has attracted many loan predators. These lenders offer quick approval, sometimes even without running a credit check, in exchange for a very high interest charge and a plethora of hidden fees that can significantly affect the total cost of your loan. 

Steer clear of lenders that offer “guaranteed approval” because there is no such thing. If they do not assess your repayment capacity, they could be more interested in taking away your money through a very high interest charge. They could also be eyeing your properties if you pledge them as collateral for your loan.

Thus, while bad credit loans can help you get out of money trouble and gives you a chance to improve your credit rating, you should understand all the implications of taking out one. Do your research and compare bad credit loan offerings from several lenders to avoid getting exploited by loan predators.


Loans For People With Bad Credit help Aussies get a second chance at financing. We work with trusted lenders across the country to match you with the right loan. 

Call us on 1300 769 384 or request a Loan Pre-Approval.


See also:

Top Myths About Bad Credit Personal Loans That Should Not Discourage You

How Many Months Does It Take to Fix Bad Credit?

You’re a Victim of Predatory Bad Credit Loans, Now What?

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.


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