How to take out personal loan with bad credit

Having a tough time getting a personal loan in Singapore because of a bad credit rating? Here's what you can do to improve your chances.

There are many situations that you could find yourself in need of a sum of money. Retrenchment will leave you without an income, while an accident or sudden illness could prove financially catastrophic, especially if there is insufficient insurance coverage.

In situations like these, a personal loan can help provide the funds you need to cover your pressing expenses. However, if your credit score isn’t in the best shape, you may find it difficult to get your personal loan approved.

Here are some options you can explore.

Apply for a smaller loan amount

A bad credit score may prevent you from getting a large personal loan from a bank. This is because a poor score or less than stellar credit history may indicate your inability to service your loan payments.

Hence, if you are having trouble getting your personal loan approved, try improving your credit history first.

You can do this by applying for a smaller personal loan. If you’re granted this loan, make sure you don’t miss any payments. Set reminders or get a reliable friend to remind you of the due dates on this loan. And strive to make each payment in full.

The idea is to demonstrate you can keep up with a prescribed repayment schedule. This will indicate your ability to repay your loan, which banks will find favourable.

You may need to borrow and pay back a small loan a few times to build up your credit score to the point where banks feel comfortable enough to grant you a larger loan.  

Compare Best Personal Loans

Restructure your outstanding debts

A bad credit score almost always indicates the presence of outstanding unsecured debt. One thing you can do to improve your chances of getting a personal loan is to deal with your existing debts first.

If you do not have the ability to pay off your outstanding debts, contact your banks and ask for options to restructure your debt. That is to say, work with your bank to reduce the interest rate that is being charged on the amount you currently owe. You can also negotiate a longer repayment period to lower the amount you need to pay each month, which could help you keep up with your payments.

Some ways to restructure your debt may be through a balance transfer or a debt consolidation plan. You can also approach Credit Counselling Singapore for assistance in setting up a debt negotiation meeting with your banks.

The point of restructuring your debt is so you can start paying down the monies you owe. By making regular payments – in full and on time – you are repairing your credit history while making progress on clearing your debt.

This may allow your credit score to recover enough for the bank to approve your personal loan application.

Compare Balance Transfer

Compare Debt Consolidation Plans

Seek non-bank financial institutions

You can increase your chances of getting the loan you need by widening your pool of options.

Besides the banks, try approaching non-banking financial institutions, such as Hong Leong Finance or Singapura Finance. These finance companies are registered with the Monetary Authority of Singapore and provide a range of loans that could fit your needs.

Like the banks, finance companies also rely on your credit rating and history to assess your risk as a borrower. (They are, after all, providing you with an unsecured loan.)

However, finance companies may have different risk appetites, or offer a different package (such as having higher interest rates) that you might qualify for.

See also: Your Go-To Personal Loans Guide in Singapore

Approach licensed moneylenders as a last resort

We generally do not recommend getting loans from moneylenders in Singapore. The loans they offer usually come at very high interest rates of up to 4% per month, which can make it difficult for you to pay back your loan.

One exception is Credit Culture, one of six fintech companies selected by the Ministry of Law in a pilot program to diversify the business model of personal loans in Singapore. Credit Culture offers interest rates starting from 0.8% per month, capped at 1% per month and no early repayment penalties. 

As licensed moneylending is a high-risk, high-reward venture, such companies may only be willing to offer small loan amounts. Lending a small amount makes it easier for them to recover the principal amount – they would only need to collect a few high-interest payments. This reduces the risk of them making a loss.

In the event you do see the need to resort to a licensed moneylender, make sure you understand clearly the repayment schedule, the terms and conditions of the loan package, and give yourself a waiting period to think it over.

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