Can you get a personal loan with a low credit score?

If you’re considering applying for a personal loan, you may be worried that your bad credit history will hinder your chances of a successful application. This is a valid concern, but you shouldn’t let it stop you from applying altogether.

Having a bad credit score can indeed reduce your chances of getting a personal loan. However, it’s not impossible. Several lenders will consider applications with less-than-perfect credit scores.

Before we go any further, you first need to understand what a personal loan is and what it means to have a bad credit history.

This is an amount of money that’s lent to you by a bank or financial institution. The loan amount is given to you in one lump sum, which you must pay back in monthly instalments over an agreed-upon period, which could be anywhere from one month to several years. This instalment is also accompanied by an interest rate, which is determined on a case-by-case basis.

Taking out a personal loan is similar to when you borrow money from a friend. You will be expected to pay it back over time, and you and your friend will decide how much you need to return each month until your bill is settled.

You can use a personal loan to buy anything you choose because it’s not tied to a specific asset. The most popular reasons for getting a personal loan include paying medical bills, starting your own business, consolidating your debt, or paying for a big event (such as a wedding).

Returning to the previous example, your friend is more likely to lend you money if you have a good reputation for returning borrowed money. Similarly, financial institutions need to determine whether you can be trusted with a personal loan, and your credit score is an indication of how well you handle debt.

If your previous creditors have reported you for doing any of the following, then you will have a negative credit history and a bad credit score:

• Missing monthly repayments
• Defaulting on payments
• Declaring bankruptcy
• Frequent credit enquiries

There are numerous credit bureaus in South Africa, and each of them have their own scoring system. At ClearScore, we receive our data from Experian, where 550 is considered the line between a good and bad score. This is a good benchmark to determine whether your score will make the cut.

However, when it comes to your loan approval, the final say lies with your chosen lender. Some will require you to have a higher score than this, while others will be comfortable with a lower score.

Another point to keep in mind is that you will be offered more favourable terms for your personal loan if you have a higher credit score. For example, you could be approved for a personal loan if you have a credit score of 603, but you may be charged a higher-than-normal interest rate.

To make it easier for you to understand, here’s a quick table of the credit score bands we use:

To every problem, there’s always a solution, and the same goes for a bad credit score. You can improve it by following these steps:

• Always pay your bills on time: a missed or late payment will negatively impact your credit score. If you struggle to keep this deadline, reach out to your creditors immediately and discuss it with them. You may be able to negotiate a grace period.

• Don’t apply for a lot of credit: too many credit applications can negatively impact your credit score and raise a few eyebrows. It's best to keep this to a minimum and avoid making too many credit applications in a short period.

• Watch out for fraud: Keep an eye on your credit report so that you can pick up on any suspicious activity. By doing so, you’ll save yourself from not only a damaged credit score but also having to pay for someone else's actions.