How to get a personal loan with average credit

Understanding personal loans for people with an average credit score

If you have an average credit score – for whatever reason – you may think that you are ineligible for a personal loan. Not too long ago, when the big banks were the only major players in the personal loan industry, it could be very difficult for people with average credit to obtain finance.

Today, however, the rise of alternative and online lenders has given new hope to people with bad credit histories. Having average credit means that you are seen as high risk for a lender. For this reason, lenders typically charge higher interest rates when offering a personal loan to someone with an average credit score. In a similar way, self-employed people and first home buyers are also sometimes considered high risk and attract a correspondingly high interest rate.

What is a credit score?

Your credit score is a number between 0 and 1,000 that equates to a rating on a five-point scale from "weak" to "excellent." In order to calculate your credit score, credit reporting agencies compile your personal and financial information. They include the level of credit you have borrowed in the past, the credit limits and debt you currently have, the volume of applications for credit you have made, and any defaults on previous credit repayments or unpaid utility bills, among other information.

You can check your credit score and full credit report, provided by Experian for free with finder.

Depending upon the credit reporting agency, your credit score could be as high as 1,000 (Experian) or 1,200 (Equifax). The average credit score for Australian adults is approximately 550, which is considered "average." In practical terms, a credit score of 550 means that there is a one in 12 chance that you will have a negative event, such as a loan default, recorded on your credit file within the next year.

A credit rating of 600 or higher will put you in the "good" or "excellent" categories, while anything lower than 500 will be considered "fair" or "weak."

What is an "average" credit score?

An "average" credit score lies in the range of 500 to 600, taking into account Australia's average of 550.

The Finder app: Find out your credit score

What personal loans can I get with an average credit score?

What will my interest rate be?

One of the defining features of personal loans for people with average credit scores is that risk-based pricing is typically used by lenders to determine the applicable interest rate for the loan. Risk-based pricing occurs when the lender does not offer a set interest rate for a loan but instead gives an interest rate range. When an application is made by a potential borrower, the lender will assess the suitability of the borrower, taking into account the borrower's credit score. If the lender decides to make a loan offer to the borrower, they will nominate an interest rate within that range, which reflects the level of risk that is deemed to be applicable.

For example, a lender may advertise interest rates between 12.99% p.a. and 19.99% p.a. Once a loan application has been made, if the lender decides to make a loan offer, an interest rate closer to 12.99% p.a. might be offered to an applicant with a "good" or "excellent" credit rating that is deemed to be low risk. However, an offer closer to the lender's upper limit of 19.99% p.a. might be made to an applicant with average credit.

In addition to your credit score, the lender will take into account the proposed loan amount and loan term, and your financial history, employment history and personal circumstances.

How do I compare my personal loan options?

It can be more difficult to compare loan products with risk-based pricing because, until you put in an application with a particular lender, you don't know what interest rate you're going to be offered. Consider the following factors when comparing personal loans:

• Interest rate range. While you don't know the specific interest rate you could be offered, you can still take the rate range into consideration when comparing loans.
• Security. Is the personal loan secured or unsecured? If you have residential property to offer as security, you could be offered more favourable loan terms than with an unsecured personal loan.
• Fees and charges. Ensure that you are familiar with application fees, ongoing fees and early repayment fees. These may or may not be linked to the interest rate you are offered.

Frequently asked questions about personal loans for average credit scores

• Is it possible to get an idea of the interest rate for a risk-based pricing loan before making an application?

  While you won't get a definitive offer until after you have put in an application, most lenders will give you a rate estimate without requiring a formal application. Make sure you confirm with the lender that this enquiry will not be noted on your credit file.

• What is the difference between a personal loan and credit card?

  While both could potentially give someone with an average credit score access to upfront funding, credit cards tend to attract higher interest rates than personal loans, even with risk-based pricing. Personal loans have a set repayment schedule with a predefined payout date, unlike a credit card which is less structured.