A person’s credit score is a single number that indicates how risky the person is to lend money to, as determined by all financial transactions in which they have been involved over a given period of time. A high credit score indicates very little risk: the person typically pays what they owe on time, while a low credit score indicates a lot of risk. Therefore, a bad credit loan would be a loan to somebody with a low credit score, or a “high risk loan.”
How is the cost of a loan determined?
The primary factor in determining the cost of a loan, or the amount of interest that must be paid, is the borrower’s credit score. However, this is not the only factor. A lender may also take into consideration such factors as the amount of collateral that is up against the loan, the way the money from the loan will be used, and whether the credit score truly represents a person’s history. For example, a credit score will take a huge dive if a person goes bankrupt. But many lenders will be willing to ignore a bankruptcy if it was caused by medical bills.
How much more in interest will I pay for a bad credit loan?
Because the credit score is not the only factor in determining a person’s interest rate, the answer is that it varies. First, bad credit is a subjective term. Different banks will consider different credit scores to be bad. Also, it is not that difficult to lower the interest rate on a loan. Ask for a lower equity to loan ratio (that is, offer something worth more as collateral or ask for less money), or pay off the loan over a shorter period of time. Many banks are even willing to give the formula that they use for determining the interest rate. By manipulating the variables anybody, with any credit, can get a good loan.
*Affects pricing. With the No Closing Cost
Option, borrowers finance the closing costs instead of paying for them at
closing. Borrowers who pay closing costs at closing may qualify for a lower
interest rate. Some upfront fees (ex. credit report and appraisal) may apply
and may be credited at closing.
*Refinancing or taking out a home equity loan or line of credit may increase
the total number of monthly payments and the total amount paid when compared to
your current situation.
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