A host of defaults, foreclosures, and bankruptcies have been in the news recently, but the economic slowdown isn’t entirely responsible for the popularity of bad credit loans. There has always been a market for these types of loans. Now, increased demand has often outstripped supply, and this has resulted in a significant increase in overall borrowing costs. Poor credit loan seekers should think long and hard before entering into such a loan. Take a look at what’s going on within the lending industry so you can make an informed decision and avoid additional costs when getting a bad credit loan.
bad credit ratings
For borrowers with bad credit, attempts to obtain loans can be compared to pushing your way through a cinder block wall: a lot of effort and many opportunities to do serious damage to an already tarnished credit history. Every time a loan applicant with bad credit applies for a loan, a background check is performed, which includes an identity check and a credit check. Based on those findings, a lender decides if she will pre-approve you for a loan. If she gets pre-approved, a more thorough review of her income, work and expenses is done to make sure she can manage the loan without going overboard.
Many people don’t understand that each credit inquiry costs them a few points on their credit score. Credit score inquiries typically make up around ten percent of your score composition. Every query on your credit report counts against you. He is considered desperate for cash. If you pull your own credit report, nothing counts against you. And most lenders will accept your copy of your credit report, so take it with you or have it available in electronic format (.PDF or similar) so you can present it to your prospective lender. That way, they won’t need to do what’s called a thorough review of your credit report to pre-approve your loan; that will prevent your report from getting hit every time you apply for a loan.
Unsecured personal loans can be expensive
Most of the poor credit loans are unsecured personal types. Lenders have no collateral needs and are taking a very high risk by lending to bad credit loan seekers. Therefore, higher interest rates and more fees are charged. Many buyers feel that they are cornered and have no choice. If poor credit seekers look closely at your loan documents, they will see that interest charges account for more than half of your repayment costs, especially in the first few months of repayment. These bad credit borrowers will find that they will have paid twice the original loan amount once they see the figures at checkout. Bad credit borrowers should carefully consider all available options before signing on the dotted line. Some people have ended up worse off than they were before taking out the poor credit loan.
Bad Credit Loan Prepayments Save Money, Improve Credit
Of course, any lender wants borrowers to make their scheduled payments, since they make money off interest charges and other fees. Be careful, to minimize unwanted occurrences, and only borrow the amount you really need and pay off the obligation as soon as possible. Regardless of your scheduled monthly payment and fees, try to pay off the loan early. That will make two big differences in your financial affairs. First, you’ll save a lot of money that would have gone toward interest and other fees. Second, your credit score will benefit by showing potential lenders that you can manage your debt. Bad credit loan seekers should be responsible in their borrowing inclinations. By doing so, they will be pleasantly surprised at how quickly their credit scores improve.