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:

Credit score below their minimum (usually 600-650)
Defaults recorded in last 5 years
Current or recent bankruptcy
Insufficient income documentation
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:

Property equity: Primary focus
Current income: Can you afford repayments?
Credit explanation: What caused the defaults?
Exit strategy: How will you repay?
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:

Property equity: At least 20-35% equity (varies by credit severity)
Income proof: Bank statements, BAS, or alternative evidence
Ability to service: Demonstrate you can afford repayments
Credit explanation: Written explanation of defaults/issues
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:

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

Check your credit report (free)
Calculate your equity: Property value - existing loans
Prepare explanation for credit issues
Gather income evidence
Connect with bad credit specialists: 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 - confidential assessment, no obligation.