Bad Credit Loans

Accessing funds with bad credit in South Africa: A comprehensive guide

The term “bad credit” is not really as terrible as it sounds. It doesn’t always imply that your whole credit history is bad. It just suggests that your credit profile could be better and isn’t as satisfactory as you would like it to be.

Rejection by lenders in the past is usually due to the fact that your credit score didn’t adhere to their specific requirements.

Filling the gap

There are many bad credit loan lenders who are ready to assist you if you fall into the bad-credit category, or even if you are blacklisted. Their primary concern is whether you’ll be able to afford a credit loan. Your credit history doesn’t have much of an influence on the qualification criteria.

These loans are specifically designed for those with a less than favourable credit history. Unfortunately, they’re much more expensive than traditional loans.

Know your risk profile

Your credit profile is in essence a history of how you’ve honoured your financial commitments in the past. If you have adhered to all your repayment agreements it’ll be favourable and you’ll be attractive to lenders.

Each time you secure a loan, it’s recorded on your profile, and how you repay the loan will either benefit or reflect negatively on your credit score.

Non-payment will always have an adverse effect on your score and you’ll be flagged as high-risk. Traditional lenders won’t grant you any credit.

Understanding credit ratings

In general, credit scores range between 300 and 850. Under 580 is flagged as low or bad. There can be a number of reasons for your bad rating, such as a too-short credit history, a history of late payments, too much debt when compared to your income, or a combination of all of these factors.

A low credit score usually has two basic explanations.

Due to unforeseen challenges, such as loss of income or other financial challenges, you’ve been unable to keep all your credit payments up to date. Because you have just skipped a few repayments, you don’t have any judgments against you yet. Unfortunately, your credit score will now be too low to qualify for a traditional loan

You have not borrowed money before and therefore have no proven credit history. There’s no credit information for banks to work on and you’ll therefore not qualify for a loan. This is because you will be categorized as a high-risk client who might default on payments.

Types of bad credit loans

The easiest bad-credit loans are secured, co-signed, and joint loans because these mitigate the lender’s risk as they offer a form of collateral. Pawnshop- and car-title loans also resort under this category.

No-credit-check loans or unsecured loans

These types of personal loans are the easiest to secure as they don’t require co-signers, surety, or a joint applicant. They’re therefore much more costly than loans from lenders who do credit checks.

These loans are perfect for those who:

• are blacklisted or have bad credit ratings.
• don’t own their own properties or vehicles.
• only need a small loan.
• don’t want to offer surety on a loan.

The drawback of these loans is that you’ll get very expensive monthly repayment structures that will put additional pressure on your budget. This could exacerbate your financial situation even more.

Even if a lender entices you with a longer repayment term, you’ll end up paying much more interest in the long term because it affords the lender more time to collect interest from you.

These loans will hardly have an impact on your credit score, which could leave you in an unfavourable credit situation for longer.

Secured personal loans

You’ll have to produce security to qualify for these loans as the lender needs to mitigate his risk. Should you default on repayments, you risk losing your precious asset. Approval is usually quick since the lender’s risk has been addressed.

These loans are perfect for those who:

• have been refused credit by their banks.
• are blacklisted and therefore can’t pass credit checks.
• have the financial ability to meet repayments.
• need a bigger amount than offered by unsecured loans.
• want to consolidate their debt into a single consolidation loan.

Cash advances

A cash advance enables you to draw money from your credit card’s available balance up to your credit limit. This additional amount is incorporated into your card’s outstanding balance. These advances usually come with very expensive interest rates.

Although a cash advance can get you out of a financial pickle quickly, it will take you much longer to get out of your credit debt and cost you much more too.

The plusses:

• You get quick access to funds in case of emergencies.
• It’s not as expensive as payday or no-credit-check loan options.
• Your credit history won’t be scrutinized.

The negatives:

• It’s extremely costly.
• You must have an available balance on your credit card.

Payday loans

This is a small once-off short-term loan you repay when you get your next paycheck. These loans are the easiest to get. It’s advisable, however, to try to avoid them as lenders charge extremely high-interest rates for this convenience.

Alternatives to bad credit loans 

Lastly, you can try borrowing money from family or friends as they don’t care about your credit score. If they have a good credit rating, they can even co-sign a loan application for you.

Secured or not

Secured

• You provide an asset such as property, a vehicle, or a caravan as surety.
• The lender will keep the asset as collateral in case of default.
• You pay less interest and get better terms on loans.
• You also qualify for bigger loan amounts.

Unsecured

• The only surety the lender gets is your word that you’ll honour your loan commitments.
• This is a high-risk option for lenders and they will charge high interest rates.
• Because of the considerable risk involved, you’ll be turned down by traditional lenders.
• Terms are usually fixed and you’ll have very little if any, flexibility on repayments.

The plusses and negatives of bad credit loans

The plusses

• The online loan application process is swift and you can get your money within 24 hours.
• You’ll pay less interest than is the case with credit cards.
• You have a wide variety of lender options to choose from. If you can exercise some patience, lenders could quickly compete for your business, enabling you to get an interest rate that falls into your budget.
• You’ll be spoiled for choice.
• If you honour your loan repayment agreements, you’ll be able to improve your credit score so you can be more attractive to lenders in the future.
• Loan terms can run up to 5 years, enabling easier repayments.

The negatives

• You pay very high interest rates on these loans, as the lender has to mitigate his risk and usually wants considerable rewards.
• You need to understand the fine print of your contract as there could be hidden costs such as a loan originality fee, as well as prepayment and late fees, that could be charged too. There are lenders who’ll even charge you for making payments by check.
• Some lenders aren’t properly licensed. Choose a company that’s certified as you’ll enjoy protection under the Credit Act.
• Lenders might require surety. You could be putting your assets at risk if you default on the repayments.

There are a lot of predatory lenders out there and you could soon find yourself drowning in even more debt. Ensure that your loan agreements are valid and that they include long-term benefits.

It’s always a good idea to contact a non-profit credit counselling agency to advise you on the best options out there.

You need to compare all your options carefully. Take your time doing this so that you don’t fall into the trap of accepting the first credit offer that comes your way.

Getting a bad credit loan to suit your needs

You might feel at a loss about where to start looking for a lender who’ll be willing to grant you a loan. Securing a bad credit loan is easier than you think.

It’s advised that you take the following steps:

1. You first have to determine whether your credit score puts you in the “bad credit” category and what you need to do to improve your creditworthiness.
2. Complete a variety of loan applications with traditional banks, online lenders, and credit unions.
3. Ensure that you submit all the required documentation about your income and expenses to potential lenders. These will be used to validate the interest rate you will pay.
4. Carefully review all your loan offers and consider the rates and terms of each.
5. Upon getting your loan, work hard to repay your debt and improve your credit rating.
6. If you keep to your loan agreement, you’ll be pleasantly surprised to see how much your score can improve in six months.

Scam alert!

It’s a sad fact that there are a lot of loan sharks out there, waiting to devour you at every turn. These loan scammers target the desperate and elderly, and those who are inexperienced when it comes to making sound financial decisions.

Red flags to look out for when considering which lender to approach

• The lender is not registered with the NCA.
• There’s no physical address and all negotiations are conducted over the phone.
• The lender requests money up-front to secure a lower interest rate.
• The lender requires a prepaid debit or gift card as “insurance” on the loan.
• Your loan proposal is vague on terms such as fees and interest rates.
• The lender requests a lot of personal information even before you enter into negotiations.
• You get pressured into a quick decision.
• If an offer sounds way too wonderful, it’s usually a red flag in itself.

Qualification criteria

• Be between 18 and 65 years of age
• Be gainfully employed, earning at least R 3 000 per month.
• Produce a certified copy of your South African ID document.
• You have to produce proof of income in the form of your last three salary slips.
• 3 months’ bank statements and proof of residential address.

How much can you borrow

• The lender will offer you an amount by taking your income and credit profile into account.
• Borrowers with a sound credit history will qualify for a bigger amount.
• If your credit rating is low, you’ll only qualify for a minimum amount.
• To qualify for bigger amounts, you first have to improve your credit rating.

Honour your commitments

Keep in mind that the objective of a bad credit loan is two-fold: It enables you to repay debts and serves as a tool to improve your creditworthiness. It’s therefore vital that you honour the loan agreement.

If you’re unable to meet your obligations for whatever reason, you need to alert the lender to the fact immediately. They’ll usually try to help you.

Dare to compare

It’s vital that you scrutinize the interest rates and special features of the loans you consider applying for. Only consider credit providers registered with the National Credit Regulator (NCR).

Look at those lenders who offer the amount you want and then eliminate them according to the amounts they are willing to offer, their annual interest rates (APRs), and the number of additional fees you’ll have to pay. The most crucial considerations are the features of the loan agreements and interest rates.

Application is easy

• Most bad credit lenders offer online application processes that are easy to navigate.
• You can apply from the comfort of your home and there’s no face-to-face contact with the lender.
• Complete the form as thoroughly as you can and supply all the requested detail.
• Make sure you’ve uploaded all the required documentation to ensure a swift response.

So bad credit loans aren't as bad as you thought, are they?

It makes financial sense to ensure that your credit profile stays attractive to lenders. Unfortunately, life happens and bad credit loans offer a quick fix in case of an emergency. Only opt for a bad credit loan if you’ve exhausted all other avenues, as these loans are very expensive and can lead to even more serious money woes.