Do you want to settle for a bad credit loan?
It is certainly more difficult than it was in previous years, but you may still be able to get a bad credit loan if you have steady employment and make enough money. But even if you can get a bad credit loan, do you really want to?
But, if you are able to get approved for a loan when you have a bad credit score, the interest rate and terms you will be offered will probably quickly offset whatever satisfaction you felt. When you have a low credit score, lenders interpret this as meaning that you are a high credit risk and are more likely to default on a loan than someone with a good credit score. To offset this risk, lenders will likely charge you much higher interest fees. Then, if you or anyone else they are lending money to ends up declaring bankruptcy or otherwise defaulting on the loan, they have all that additional money they charged people with bad credit to cover the loss.
Basically what is happening is everyone with a bad credit loan is paying extra to make up for the fact that the people with bad credit loans are more likely not to pay off the entire loan. And these extra fees can be very steep. Using the chart below, you can see with a bad credit mortgage, the numbers are far staggering. On a 30 year mortgage of $250,000, someone with bad credit could end up paying over $132,574 more in interest payments than someone with good credit.
|CREDIT STATUS||RATE||PAYMENT||COST OF BAD CREDIT|
Of course, when you look at the numbers this way, it seems that people with bad credit loans are getting charged much more than is required just to cover credit risk. Perhaps this is why so many companies are eager to bring in more bad credit clients.
An alternative to bad credit loans
Odds are slim that anyone truly wants to settle for a bad credit loan. After all, who wants to pay thousands, tens of thousands, or even hundreds of thousands of dollars more than someone with good credit for the exact same thing?
Going back to the $250,000 mortgage example, with a bad credit loan you could expect a monthly payment of over $2,500. If you had a good credit score, however, and were still able to make the same $2,500 a month payment, you would be able to afford a $400,000 home. Even if you can afford the payments on a bad credit loan, by settling for such a loan you are not only setting yourself up to lose significant amounts of cash, but you are also denying yourself the opportunity to purchase a larger home or a nicer automobile.
So what can be done about bad credit?
As you remember, the extra interest payments are much like an insurance policy for lenders. Everyone pays interest fees on their loans to provide lenders with profits and to give them extra money to cover the losses associated with defaulted loans. Also, much like an insurance policy, higher risk individuals are charged more than lower risk individuals.
The problem in the credit world is that the tools lenders have for determining credit risk are far from perfect. Credit reporting errors and omissions along with a questionable credit scoring model have created a situation where many people have credit score that are lower than they should be. Because of this, there are people who are being forced to pay higher interest rates than are necessary to cover their true credit risk.
Deserve better than a bad credit loan?
Fortunately for people in this situation, the law affords all Americans the right to dispute any items in their credit report that they feel may be inaccurate, untimely, misleading, incomplete, ambiguous, unverifiable, biased or unclear ("questionable"), and because negative credit listings have such a large effect on credit scores, by removing these listings, people have been able to move from poor credit to credit scores of 700 and above.
Lexington Law helps consumers legally dispute these questionable negative listings and in 2015 alone was able to help clients remove over 7,500,000 negative items from their credit reports.
When considering a bad credit loan, many people feel like they are stuck with their current credit score. Why else would they be willing to sacrifice so much? If you are in this situation, make sure to explore your options. You may find out that after a few months of proactively working to improve your credit is enough to help you qualify for loan at much lower interest rates. And when the savings associated with those rates could mean the difference between a modest $250,000 home and a sprawling $400,000 property, there is no reason not to look into credit repair.