Saturday, October 18, 2003

Loans & Bad Credit History

In the United States, the three major credit bureaus -- Transunion, Equifax and Experian -- keep track of your financial history by serving as a reporting medium between government agencies, companies, credit unions and banks to whom you can or do owe money. They give a uniform report of your credit worthiness with a numerical credit score. When you fail to meet your financial obligations, this damages your credit score and makes it more difficult to get loans.

Causes of Bad Credit

    Your existing loans can be a contributing factor to your current credit history dilemma in two different ways. First, if you have a number of outstanding loan debts, this may mean that your debt-to-income ratio is high, and a high debt-to-income ratio hurts your credit score. Second, part of your credit score calculation comes from your debt payment history. If you have outstanding auto loans, home loans, student loans, business loans or any other kinds of loans, they probably require you to pay a certain amount of money every month. If you fail to do so in a timely manner, they will report this to the credit bureaus, and every delinquent payment will hurt your credit score.

A Low Credit Score

    For most conventional lenders, such as banks and credit unions, a good credit score would be 700 or above, while a poor credit score would be below 600. If your score is between 500 and 600, you may be able to get a loan, but it will be difficult. If your score is below 500, you probably will not be able to get a loan from a conventional lending institution.

Interest Payments

    Some lenders are willing to give loans to people with poor credit scores. However, they know that lending to people with poor credit scores comes at a high risk of not being able to collect on the loan. For this reason, in order to make an aggregate profit, lenders charge higher interest rates to borrowers in this bracket.

Securing the Loan

    If you have a poor credit score but you need a loan, one way of getting one at a relatively low interest rate is by securing your loan. When you secure a loan, you pledge something of value as collateral for the loan. In this way, you agree that, if you fail to make payments, the lender can seize whatever you have pledged as collateral to collect on the loan. While securing your loan means a higher risk on your end, the fact that it means a lower risk on the lender's end translates to higher probability of approval and lower interest rates.

Unconventional Lenders

    As opposed to banks and credit unions, some companies specialize in making specific types of loans, even to people with poor credit scores. Such companies might specialize in making auto loans, home loans, title loans, payday loans and other loans to individuals who face difficulties in getting loans from conventional lenders. Beware of such lenders, though. While many are legitimate businesses that offer fair market interest rates for someone in your situation, some are predatory in nature and may look for ways to drastically increase your interest rates without provocation. Before agreeing to such a loan, do some research on the company. Even if you are dealing with a legitimate business, though, remember that the market interest rate for loans to people with poor credit scores is going to be high.


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