When you take out any loan, you will be charged a fee, which is called interest. Unfortunately, when you take out a bad credit loan you will have to pay an extremely high amount of interest compared to those who don't have bad credit. That is because your lender sees you as a huge risk. Your bad credit history is a giant warning flag to lenders that tells them that you probably will not repay your loan. So the only way your lender will consider giving you the loan is if your promise to pay an exorbitant fee for the money.
While people with good credit may be able to afford those high interest charges, having bad credit normally means you have a tough time making ends meet. Between trying to pay your bills on time and repay your enormous credit card debt, the last thing you need is to pay extra for a loan. Instead of settling for the bad credit loan the bank gives you, you do have options.
Don't Settle for a Bad Credit Loan -- Improve Your Credit Before Borrowing I know what you're thinking, "But, I need the loan now." While that may be true, I want you to first think about how important getting a loan is. Can it wait a year? Do you really have to have a new car or house at this moment? The amount of money you could save may tempt you to wait.
Let's just say you have a credit score of 620. You're current interest rate for a $216,000 30-year mortgage is 7.92% ("FICO Scores Affect Your Monthly Payments"). Over the life of your loan, your monthly payment will be $1,572.90 and you will pay a total of $350,244.67 in interest payments. Whereas, if you waited to borrow until your credit score had improved to 660, your current interest rate for the same loan would be 6.95%. You would only have to pay $1,429.81 a month and your total interest payment would be $298,730.69. By waiting to improve your credit score, you would save $51,513.98. That's a lot of money, and if you improve your score even more the amount you save will continue to go up.
Take the Bad Credit Loan and Refinance in the Future
Sometimes you really need the money and can't wait until you get a better credit score. When you face those hard times, the best move is to shop around. Look at the interest rates different lenders are willing to give you. Take the loan with the lowest interest rate you can find. That way you will be paying less for the loan. Just make sure the lender you are working with is credible. You don't want to fall for a scam and end up losing even more money. Also, remember to apply for all of the loans you are looking at within a two-week period. That will really help to improve your credit score because all loans that are applied for within 14 days only count as one loan application (Quinn, 119).
Once you have signed for your bad credit loan, start working on improving your credit. Check your credit score to see how it is improving. Once your credit score has improved enough, think about refinancing your loan for a lower interest rate. If you have a lot of credit card debt or other outstanding loans, you may want to consider consolidating all of your debt under one loan with a lower interest rate. When the time comes you should shop around to see which option will save you the most money.
Have Someone Co-Sign Your Loan If someone with good credit co-signs your loan, you may be able to get a lower interest rate. That would be a huge plus for you, but know that whoever cosigns your loan is taking a huge risk. If you are unable to make your payments, your cosigner would be responsible to repay your debt. If they cannot afford to pay your monthly payments, it could ruin their credit.
Before you ask someone to cosign a loan, make sure you can without a doubt make your loan payments. If you might not be able to make your payments, you should not ask someone to cosign. You do not want to feel guilty for possibly ruining someone else's life.
The Rest of Our Bad Credit Loan Guide: