# How to Get a Loan with Bad Credit: Private Lending Options in Australia
Bad credit can feel like a roadblock, but private lenders offer pathways when traditional banks say no. Here's how to navigate private lending with impaired credit.
## Understanding "Bad Credit"
**What Lenders See:**
Banks typically decline if you have:
- Credit score below 600 (Equifax)
- Defaults over $500 in last 5 years
- Court judgments or writs
- Bankruptcy or Part IX/X agreements (current or discharged <7 years)
- Multiple credit inquiries (6+ in 6 months)
- Late payments on existing loans
**Credit Score Ranges:**
- 800-1,000: Excellent
- 700-799: Very Good
- 625-699: Good
- 550-624: Average
- 0-549: Below Average (typically "bad credit")
## Why Banks Decline Bad Credit
Banks are heavily regulated and typically auto-decline applications with:
1. Credit score below their minimum (usually 600-650)
2. Defaults recorded in last 5 years
3. Current or recent bankruptcy
4. Insufficient income documentation
5. High debt-to-income ratio
**The Gap**: Many creditworthy borrowers are declined due to past issues that don't reflect current ability to repay.
## How Private Lenders Differ
**Private lenders assess:**
1. **Property equity**: Primary focus
2. **Current income**: Can you afford repayments?
3. **Credit explanation**: What caused the defaults?
4. **Exit strategy**: How will you repay?
5. **Recency**: When did credit issues occur?
**Key Difference**: Private lenders look at the full picture, not just credit score.
## Types of Bad Credit Private Loans
### 1. Caveat Loans (Easiest Approval)
**What it is**: Short-term loan secured by property caveat
**Credit requirements**: Very flexible - even recent defaults accepted
**Equity required**: 50-65% available equity
**Rates**: 2-4% per month (24-48% p.a.)
**Term**: 1-12 months
**Best for**: Urgent funding, planning to refinance soon
### 2. Second Mortgage Loans
**What it is**: Second position security behind existing mortgage
**Credit requirements**: Flexible - depends on equity
**Equity required**: Combined LVR up to 75-80%
**Rates**: 9-18% p.a.
**Term**: 1-5 years
**Best for**: Debt consolidation, property renovations, business funding
### 3. Low-Doc Loans
**What it is**: Reduced documentation requirements
**Credit requirements**: Minor defaults usually acceptable
**Equity required**: 20-40% deposit
**Rates**: 7-12% p.a.
**Term**: Interest-only or P&I up to 30 years
**Best for**: Self-employed, alternative income sources
## Bad Credit Loan Requirements
**Minimum Requirements:**
1. **Property equity**: At least 20-35% equity (varies by credit severity)
2. **Income proof**: Bank statements, BAS, or alternative evidence
3. **Ability to service**: Demonstrate you can afford repayments
4. **Credit explanation**: Written explanation of defaults/issues
5. **Exit strategy**: Clear plan for repayment or refinance
**Documentation Typically Needed:**
- ID (driver's license, passport)
- Property ownership evidence (title, rates notice)
- Recent bank statements (3-6 months)
- Income evidence (pay slips, BAS, contracts)
- Credit report (get your own from Equifax/Experian)
- Explanation letter for credit issues
## How Lenders Assess Bad Credit
**Severity Levels:**
**Minor Impairment** (Usually acceptable):
- Defaults <$1,000, paid or >3 years old
- 1-2 late payments in last 12 months
- Credit score 550-650
- **Approval**: High, standard rates
**Moderate Impairment** (Often acceptable):
- Defaults $1,000-$5,000, may be unpaid
- Multiple late payments
- Credit score 450-550
- **Approval**: Good with explanation, higher rates
**Severe Impairment** (Challenging):
- Defaults >$5,000, recent, unpaid
- Court judgments
- Discharged bankruptcy <2 years
- Credit score <450
- **Approval**: Possible but limited options, highest rates
**Very Severe** (Very Limited Options):
- Current bankruptcy
- Recent court writs/enforcement
- Multiple large unpaid defaults
- **Approval**: Rare, caveat loans may be only option
## Improving Your Approval Chances
**1. Check Your Credit Report**
Free reports from:
- Equifax: www.equifax.com.au
- Experian: www.experian.com.au
- Illion: www.illion.com.au
Look for errors and dispute inaccuracies immediately.
**2. Pay Off Small Defaults**
Paying defaults <$1,000 significantly improves approval chances. Get "paid in full" letters from creditors.
**3. Prepare Explanation Letter**
Address credit issues directly:
- What caused the defaults (e.g., illness, job loss, divorce)
- What has changed since then
- Why you can now afford repayments
- Your plan to rebuild credit
**4. Increase Deposit/Equity**
More equity = easier approval:
- 20% equity: Difficult
- 30% equity: Moderate
- 40%+ equity: Much easier
**5. Demonstrate Stable Income**
Show consistent income over 3-6 months via bank statements, even if unconventional sources.
**6. Consider a Guarantor**
Family member with good credit can significantly improve approval chances and rates.
## Cost Comparison: Bad Credit vs Good Credit
**Example: $300,000 Loan, 5 Years**
**Bank (Good Credit):**
- Rate: 6.5% p.a.
- Monthly: $2,336
- Total interest: $40,160
**Private Lender (Minor Bad Credit):**
- Rate: 9.5% p.a.
- Monthly: $2,571
- Total interest: $60,290
- **Extra cost**: $20,130
**Private Lender (Moderate Bad Credit):**
- Rate: 12.5% p.a.
- Monthly: $2,789
- Total interest: $82,370
- **Extra cost**: $42,210
**The Strategy**: Use private loan short-term, then refinance when credit improves.
## Refinance Strategy
**Month 1-6**: Private loan, start credit repair
- Pay all bills on time
- Reduce other debts
- Build savings
**Month 6-12**: Apply for bank refinance
- Credit score improving
- Demonstrated payment history
- Lower rate = significant savings
**Real Example:**
Sarah had defaults totaling $3,500 from medical bills. Credit score: 520.
- **Month 1**: Private lender approves $250,000 @ 11% p.a.
- **Month 6**: Pays off defaults, gets "paid in full" letters
- **Month 12**: Credit score now 640
- **Month 13**: Refinances to bank @ 6.8% p.a.
- **Saves**: $875/month in interest
Total "bad credit cost": ~$13,000 for one year, but gained access to needed funds.
## Red Flags to Avoid
**Predatory Lenders Warning Signs:**
- Upfront fees before approval
- Pressure tactics or rushed decisions
- Rates above 15-20% p.a. (except short-term caveat loans)
- No proper loan agreement
- Unclear fee structures
- No Australian Credit License (ACL)
**Protect Yourself:**
- Check lender has ACL: search ASIC Connect
- Get everything in writing
- Read all documents before signing
- Get independent legal advice
- Never pay large fees upfront
## Alternative Options
**Before Private Lending, Consider:**
**1. Credit Repair**
Wait 6-12 months, repair credit, then apply to banks
- **Pros**: Much cheaper
- **Cons**: Requires time
**2. Guarantor Loan**
Family member guarantees loan
- **Pros**: Access bank rates
- **Cons**: Risk to guarantor
**3. Selling Assets**
Sell other assets to raise funds
- **Pros**: No debt
- **Cons**: May not want to sell
**4. Debt Consolidation**
Private loan to pay off defaults, then refinance
- **Pros**: Clears credit file
- **Cons**: Short-term cost
## Frequently Asked Questions
**Will applying hurt my credit score?**
Each application creates an inquiry. Multiple inquiries in short period can reduce score by 10-20 points. Work with a broker who can assess options without multiple applications.
**Can I get a loan with current defaults?**
Yes, many private lenders accept current unpaid defaults if equity is sufficient.
**Will bankruptcy prevent me from getting a loan?**
Discharged bankruptcy: Possible after 1-2 years with private lenders
Current bankruptcy: Very limited, mainly caveat loans
**How long until I can refinance to a bank?**
Typically 12-24 months of:
- Clean payment history
- Defaults paid or aged
- Improved credit score (650+)
**Can I get a loan with no income?**
Very difficult. You need to demonstrate ability to repay. Options:
- Rental income from property
- Savings drawdown (limited)
- Asset sales plan
- Partner income
## Your Next Steps
1. **Check your credit report** (free)
2. **Calculate your equity**: Property value - existing loans
3. **Prepare explanation** for credit issues
4. **Gather income evidence**
5. **[Connect with bad credit specialists](/connect)**: We work with lenders who understand credit challenges
## Real Success Stories
**James - Business Owner**
- Situation: $8,000 defaults from failed business, credit score 490
- Solution: $150,000 caveat loan @ 3% per month for 6 months
- Outcome: Funded new business, paid off defaults, refinanced to bank after 9 months
- Cost: ~$9,000 total (worth it to restart business)
**Michelle - Property Investor**
- Situation: Bankruptcy discharged 18 months ago
- Solution: $200,000 second mortgage @ 12% p.a., 2-year term
- Outcome: Renovated property, increased value $100,000, refinanced after 2 years
- Cost: ~$25,000 interest, but gained $75,000 equity
Bad credit is a temporary situation. With the right strategy and lender, you can access funds now and work toward better rates in the future.
**Ready to explore your options?** [Connect with bad credit specialists now](/connect) - confidential assessment, no obligation.