When a person takes out a loan, the lender will want some assurance the person will be paying him back. This is because, if the borrower does not pay the lender back, then the lender may lose money on the transaction. This can complicate taking out a personal loan for a person with a bad credit history -- a person who has a history of not paying loans back on time.
Bad Credit History
There term "bad credit" is relative. Credit is usually measured by credit score, a numerical grade issued by credit reporting agencies to borrowers that indicates their relative creditworthiness. All lenders have different standards for who they will lend to and under what conditions. While some lenders may not be willing to lend to a borrower with a bad score period, others will be willing to do so, although under special terms.
Collateral
There are two main types of loans: secured and unsecured. A secured loan is one in which the loan is backed up by collateral of approximately the same value as the loan. This collateral will be put up by the borrower as a form of security. If she defaults, then the lender is allowed to seize the collateral to compensate herself. Many people with bad credit will be required to put up collateral to get a personal loan.
Interest Rate
When a person has a bad credit rating, he can also expect to pay higher rates of interest on the loan's principal than people with better scores. This is because creditors will want to receive additional compensation for the risk they are running in issuing a person with poor credit a personal loan. To make the risk worth their while, lenders will charge risky lenders more money in interest payments.
Income & Assets
Credit score is not the only piece of data used by lenders in determining whether to lend to a person. Many creditors will also examine the person's income and assets. If the person is making a lot of money and has a large amount of savings or investments, then the lender may believe that the loan is likely to be paid back. Therefore, the lender may be willing to offer the loan at a lower interest rate than she would usually charge a borrower with bad credit.
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