| | - As the current global economic downturn bites, more and more people will find themselves in financial difficulty and unable to meet their existing credit obligations. They are doomed to become stigmatized as being bad credit risks. Indeed, it has been estimated that as many as 20% of the UK’s population have experienced difficulty in applying for credit already. This will mean that financial institutions could well be increasingly reluctant to offer them further credit.
- How bad your finances have looked in the past can make a big difference to how much credit will cost you or indeed whether you can get credit at all. Conversely, having no credit history can also cause problems. Lenders base what they are willing to offer you on your history - so if you've never borrowed in the past, it means they can't check how well you'd run your loan account! Such a refusal for new credit may be due to County Court Judgments (CCJ) against them; arrears; or simply having a poor credit history due to missed or late payments. CCJs and discharged bankruptcy are probably the most problematic issues when trying to get credit. These are followed by defaults where the lender has effectively stopped trying to get the money back from the borrower.
- Mortgage arrears can cause difficulties with obtaining credit too, especially if you are applying for a new mortgage or remortgage. Bad credit loans are unsecured loans which are designed to offer flexible borrowing opportunities to those who have previously been turned down for credit. When somebody applies for a bad credit loan, potential lenders will check their credit score to determine whether they will lend to them or not as well as to compute the interest rate they will offer for the bad credit loan.
- The interest rates offered with a bad credit loan to those with a less than stellar credit history are of course significantly higher than those advertised on the high street in banks and building societies. This is the because lenders of bad credit loans want to get a good return for offering credit to higher risk customers (those people believed to be at a greater risk of defaulting on their payments). Unfortunately, somebody with a poor credit record is seen as being a high risk customer for a loan, so even their bad credit loan will be more expensive.
- The interest rate offered to an individual depends on the amount borrowed (with larger amounts tending to attract lower interest rates) and the personal circumstances of the applicant. Of course, the recent turmoil in the financial markets is closely related to this type of lending. The recession was largely triggered by the so-called sub-prime lending crisis in which major financial institutions lent money to individuals to enable them to get into the property market. These loans were called “sub-prime” because they were lent to people with poor credit and (just as with bad credit loans) they had to pay higher interest rates because of the perceived higher defaulting risk. Of course when rates rose, many of these people were ultimately unable to repay their debt.
- Most bad credit loans are provided by brokers who have access to many loan plans enabling them to find the lowest rate that fits the personal circumstances of the borrower. Those with a better credit history are likely to be eligible for a lower interest rate than those with a poor credit history as statistically they are more likely to meet repayments throughout the bad credit loan term.
- The majority of bad credit lenders place little or no restriction on what the borrowed funds can be used for so whether you want to consolidate your existing commitments into a more manageable monthly amount or buy a new car, you should be able to do so. Additionally, some bad credit loan lenders offer features such as optional repayment holidays and low or no early repayment charges should the borrower be in a position to pay of their bad credit loan early. Early repayment penalties may be as much as the equivalent of two months’ interest, so it pays the borrower to check the small print carefully before making any commitment.
- Unless there are repayment penalties, it is almost always a good idea to pay of debts as soon as possible since the APR (annual percentage rate or interest) on any type of borrowing is likely to be substantially higher than the interest that will be paid on savings. Equally, those wanting bad credit loans would be well advised to shop around to find the best deals available to them. In the current financial situation, many lenders will be keen to get business (from all but the least reliable of borrowers) so perhaps now would be a good time for them to try out their bargaining skills!
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