Average credit personal loans – Find fair deals in Australia
Being stuck in the middle credit score ranges isn’t fun. On the one hand, you’re a few missteps away from the bad credit category and its subprime offers. On the other, you’re not eligible for the perks afforded to good and excellent credit borrowers.
Fortunately, it’s still possible to qualify for a personal loan with decent terms, though not easy. BestFind does some digging on how to get a personal loan with an average credit score in Australia.
How do credit scores work?
Think of a credit score ladder that starts from the bottom at 0 and goes up to 1000 or 1200 steps. The exact range varies with each credit reporting bureau (CRB), of which the two major ones are Experian and Equifax.
Now, the credit score ladder is typically divided into five sections that are labelled “excellent,” very good,” “good,” “average,” or “below average.” The CRBs generally use the following information to determine which section of the credit score ladder you’re currently on:
- Payment history. Paying your bills on time is one of the top ways of moving up the credit score ladder.
- How much you owe. A high credit utilization bumps your score down and vice versa.
- The length of your credit history. A long credit footprint boosts your score.
- Your credit mix. Having your debt under different credit accounts such as personal loans, credit cards, and car loans helps improve your credit rating.
- New credit applications. Loan applications are recorded in your credit file. Approaching too many lenders is a red flag that paints you as a desperate and, therefore, high-risk borrower.
As mentioned earlier, the CRB aggregates all this information into a credit score, which then tells financial institutions if you’re high-risk or low-risk. The best personal loans are offered to borrowers with a high credit rating since they’re more likely to repay their debt.
What’s an average credit score?
An “average” credit score for Aussies ranks somewhere between 500 and 600. This isn’t too bad, considering that Australia’s average credit score is 550. Qualifying for a personal loan with an average credit score, though tricky, isn’t the almost impossible task it once was when banks and credit unions had more monopoly.
Today, alternative lenders have levelled the playing field by offering financial products for every credit score category. However, you’ll still have to pay a slightly higher interest rate than what’s available for good and excellent credit.
What personal loans are available if I have an average credit score?
Take a look at the options for average credit loans plus how they work:
- Unsecured personal loans. Most unsecured personal loans require borrowers with a good or better credit rating. Since you’re not putting up your asset as collateral, there’s more risk to the lender, and a good credit score helps to even it out. But if you have average credit, expect to pay a higher rate as a way to offset the lender’s risk.
- Secured personal loan. If you have property or a valuable asset to offer as collateral, you can leverage a lower rate. Choosing a secured personal loan also improves your chances of approval.
- Joint application personal loans. If you’re worried your average credit might lower your chances of qualifying, you can opt for a joint personal loan. This requires adding another person to your loan application, preferably someone with a strong credit score.
- Peer-to-peer (P2P) loans. This is an online arrangement where you can borrow directly from individual lenders with no banks involved. P2P companies are responsible for matching you up on their platforms or websites. As with unsecured personal loans, an average credit score will necessitate paying a higher rate due to the risk you pose.
- Car loans. This type of personal loan is usually secured by the vehicle you’re buying, so it generally comes with a lower rate. However, failure to repay means you may lose your car. On top of that, your rate may still be higher than what someone with good or excellent credit will pay.
What interest rate will I get with average credit?
Most Australian lenders have no set interest rate and will often advertise a range instead. Specific rates are allocated on a case-by-case basis that considers the borrower’s financial situation and other details such as how much they’re asking for and the loan repayment period. If the lender has a single headline rate on display, the exact rate you get may move away or closer to that, depending on your credit rating.
Average credit borrowers do carry some risk but not too much. So a risk-based pricing model will typically allocate you an interest rate that’s in the middle of the lender’s range. If you want to trim the amount of interest you have to pay, you can reduce the loan amount and the loan term.
How do I compare average credit personal loans?
As explained above, what you see isn’t always what you get when it comes to interest rates. Still, you can compare personal loans in a way that improves your odds of getting a better deal. Consider the following:
- Interest rate. A lower headline rate is a good starting point if you’re hoping to bag the best rate available for average credit scores.
- Fees and charges. Aim for fewer costs by going for affordable establishment fees, ongoing fees, and late and early repayment fees.
- Additional features. Look at repayment frequency, whether you can make extra repayments, and if there’s a redraw facility. These features allow you to tailor the loan to your situation.
What’s the best way to improve my average credit score?
Some practical actions to take include:
- Paying off some of your debt
- Sticking to payment deadlines
- Fixing errors in your credit report
- Avoiding too many loan applications in a small space of time
Average credit score personal loans FAQs
Can I also apply for a credit card if I have average credit?
Yes, credit cards are handy when you need some fast funding. But plastic debt generally comes at a higher cost than personal loans, unless you get a 0% credit card. Also bear in mind that you can keep using a credit card (revolving credit), whereas a personal loan delivers a once-off lump sum payment into your bank account.
Can I pre-qualify for a personal loan?
Yes, some lenders can provide you with a more reliable estimate of the interest rate and terms you’ll get before you commit. This is done through a “soft” credit check, not a “hard” credit check. Therefore, it won’t dent your credit rating.
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Dennis Graham is a seasoned finance professional working within Banking, Lending and Novated Leasing. An expert finance writer, Dennis combines industry insights with clear communication to deliver insights into financial products.
