When you have bad credit, it can affect a lot of the financial decisions you make in your life. If you have had bad credit at a time when you needed to borrow money, you might have found yourself taking out a loan that has a higher interest rate, and/or a shorter loan term, than you might have faced had your credit been better.
But this can mean you have higher loan repayments, which use up more of your weekly budget. Here are some tips to repay “bad credit loans” – whether it’s a personal loan, car finance or other lending - and get back on the right track.
Understanding bad credit personal loans
When we refer to “bad credit loans”, we are talking about loans approved for borrowers with poor or limited credit history. People with bad credit are generally considered more of a higher risk to lenders, so they often charge higher interest rates or require the loan to be paid back more quickly
In New Zealand, it’s common for these loans to be offered by non-bank lenders and finance companies.
Because these personal loans can have stricter terms, if you fall behind on the repayments, it can mean interest accrues quickly or default fees are charged. There may also be penalty interest.
A few years ago, the Government took action against “payday lenders”, which offered short-term lending at very high interest annual rates. An interest rate cap now applies, so there are fewer lenders in the market offering these.
Tackling your debt
If you’d like to improve your situation, there are a few steps you could take.
Step One: Assess your current financial position
It’s always a good idea to get a clear picture of how your financial life currently looks. List your debts, including who you owe money to, whether that’s a lender or finance company, how much you have left to pay and how long that will take, as well as the interest rate you are paying and the repayment due dates. What’s your monthly repayment and when does it leave your account?
It might help to go back through your bank statements to get a clear picture. Is your debt an unsecured loan, where you have not offered the lender any security? Or is it a secured loan, where the lender has registered an interest on one of your assets, and could sell it if you did not repay your loan? Work out how much you have going out of your bank account each month, and how much is coming in.
Step Two: Create a realistic repayment plan
Next, have a look at what you can do to pay your debt more quickly. Prioritising your essential spending, such as housing, food and transport, you could draw up a budget to see what extra cash you could free up to make additional loan repayments. Note that it’s worth checking to see what fees you might be charged if you want to pay off a loan more quickly. In some cases, it might not be worthwhile.
The 50/30/20 budgeting framework might be a helpful guide to help you work out what you can afford – this is where 50 percent of your after-tax income goes on your needs, 30 percent on your “wants” and 20 percent goes to savings and debt reduction. It’s important that any amount you decide to commit to debt repayment or saving is sustainable so that you can stick with it. Automating your payments so that they go out of your account, into savings or debt repayment, on the day you are paid can help ensure you don’t forget a payment and don’t incur any late fees.
Step Three: Explore debt management strategies
There are some strategies you might consider if you need to take further action. Debt restructuring or hardship applications: If you are struggling to repay the debt you have, it is often a good idea to approach your lender in the first instance. You could ask for assistance, and look at renegotiating your repayment terms.
All lenders are required to consider hardship applications from borrowers. You might be able to extend the term of your loan to reduce your repayments, or take a holiday from repayments if the financial pressure you are under is temporary.
Debt consolidation:
It might be possible to consolidate your debt, if you have more than one loan, into a new one. In some cases, if your credit has improved you might be able to get a loan with a lower interest rate than you’re currently paying. You might also benefit from the reduction in “life admin” involved in managing multiple loans. The better finance™ team can help you determine if a debt consolidation loan is a suitable option for you and help you with the loan application if you decide to go ahead.
If you have bad credit, this may alter what is available to you but it may still be worth exploring.
Free Financial Advice Services in NZ:
You don’t have to battle through your money worries on your own. There are a number of organisations that can offer support, including MoneyTalks, Citizens Advice Bureaux and financial mentors around the country. They can help you devise a repayment strategy and negotiate with lenders if necessary.
They can also help you to work out whether you’re getting all the Government support that is available to you. There’s no need to feel awkward about seeking help – a financial mentor works with situations like this every day.
Step four: Boost your repayment capacity
You may be able to get out of debt more quickly, or more easily, by boosting your income, reducing your spending or a mix of both. Some borrowers opt for a side hustle to bring in more cash – maybe a job in the gig economy, taking on some part-time work or selling unused items online. You might be able to pick up some overtime in your current job to get more money coming in.
You could also increase the amount of money that you have available for repayments by focusing on meal planning to reduce the size of your grocery bill, making the most of loyalty schemes and discount fuel days, and checking out Powerswitch to see if you can save money on your electricity bill. When your credit improves, we can help you look at whether refinancing your debt might be an option.
Step five: Protect yourself from overwhelm
As you get on track to improve your financial future, you could consider some small changes to help keep your financial life in better health.
Set up some separate emergency savings: Even a small emergency fund can make all the difference to your peace-of-mind. Over time, you could work towards building up a small savings fund that you keep somewhere you can’t easily access, so that if you urgently need to access money, you don’t have to go into more debt to do so.
Focus on your mental health: Money can be stressful, and if things aren’t going well it can be easy to feel alone in the financial difficulty. If you’re finding your financial life is getting you down, look to put some supports in place. You could talk to family and friends, or even see whether your employer is part of an employee assistance programme that could put you in touch with a financial coach.
Celebrate your milestones: As you make progress towards repaying your debt and rebuilding your finances, take the chance to celebrate your wins. It can be motivating and help keep you on track. The milestones don’t have to be big.
Mistakes to avoid.
Watch out for these potential pitfalls:
Borrowing again while still repaying bad credit loans:
Take care when it comes to taking on more debt if you’re still paying debt that’s more expensive than you’d like. At better finance™, our team can help you look at your options if you need a loan, to see what might be available, even if you still have bad credit.
Ignoring communication from lenders:
If you’re having money trouble, it’s really important to get in touch with your lender as soon as you can. They can often help, but only if they know what’s going on. The credit contract means they have obligations, too. In New Zealand, all lenders have responsible lending requirements.
Not understanding your loan:
It’s always a good idea to make sure you fully understand the terms of your loan, whether you’re borrowing from a bank, finance company or other non-bank lender. What will your total interest cost be? What might happen if you wanted to repay your loan early? There aren’t many fee-free loans but you can make sure you know what fees can be charged and when.
Frequently Asked Questions (FAQs)
Can I consolidate a bad credit loan in NZ?
You may have options – the better finance™ team can help you determine what might be an appropriate solution.
Will repaying a bad credit loan improve my credit score?
Yes – developing a history of on-time repayments will usually improve your credit score.
What happens if I can’t make a repayment?
Let your lender know straight away. Communication is essential, and lenders really value knowing what is happening before it becomes a problem. If you miss a payment, there may be fees charged. Give your lender a call or email and find out what your options are to stay on track for your goals.
Are there government schemes to help with bad credit debt?
There are schemes such as Good Shepherd New Zealand that can help people who are struggling with debt. Your financial mentor could also help you work out what assistance might be available.
Do you have questions?
If you would like some expert personal loan advice, get in touch with the team at team at better finance™. We can help with any questions you might have about the loan process, whether you’re taking out a new loan or thinking about refinancing or consolidating existing debt. We are here to help.
-1.png?width=360&name=Better%20blog%20images%20(19)-1.png)
-1.png?width=360&name=Better%20blog%20images%20(3)-1.png)