If you are one of the many people who suffer from bad credit then this article probably won’t surprise you. Still it’s important to note the many extra challenges you will have when you have a bad credit history as opposed to people who have average or excellent credit. First, you will have to pay additional insurance on your loan. Then you will have a much higher interest rate attached to any credit you do get. If you need a loan, you will likely be required to put down a larger down payment. Lastly, finance companies are not offering a lot of loans for people with bad credit because of the lessons learned from 2008. Bad credit mortgage financing is still possible and so are personal loans, but there are a few things to be aware of.
- In the mortgage world, there is something called private mortgage insurance. This is insurance to guarantee payments or principal to the lender in the event that a borrower defaults of the mortgage. PMI is required for loans where the borrower’s put down less than 20% as a down payment for a house and is also included on some loans to borrowers with bad credit. This is something you will likely have to live with if you can get a loan and have poor credit.
- In addition to paying PMI, many lenders can require you to put down a substantial down payment for any loan that you do get approved for. This is to alleviate their risk in the event that they need to take possession of the asset. The programs that allow people to only put down 5% on a home loan are only reserved for those people with excellent credit.
- Lenders charge interest on their loans based on two factors. The first is the market rate and the second is the risk involved. Borrowers with excellent credit get the best interest rates because the lender is pretty sure that they’ll get paid back. People with poor credit get quoted the highest interest rates because they are usually risky loans. A bad credit score tells a lender that you have trouble paying your bills and/or that you defaulted on a loan in the past. Because of this, they will consider you high risk.
- Just when you thought things couldn’t get more difficult, they do. Banks and other lenders are not really lending that much right now. They are still scared from what happened to them in 2008. They are also still holding many properties that they foreclosed on over the last 6 years. They are especially afraid of borrowers with bad credit after getting burned by many of them during the real estate crisis. That means that right now they prefer to give loans to people with good and excellent credit. This does not mean that you can’t get a loan, it just means that it will be more difficult, and that when you do, the lender is in a power position to charge you additional fees and interest because they know you don’t really have a choice and can’t find better terms elsewhere.
If you do have bad credit, start getting responsible with your bills. Pay them on time and make a payment plan. Over time, your credit score will improve and you will be able to get better terms on any loans and credit cards that you apply for.