How will Bad Credit Affect your Loan

The effects bad credit will have on your loan, depend on what type of loan for which you are applying. For example, a bad credit home loan will be easier to obtain than a bad credit debt consolidation loan or a bad credit personal loan. Although getting a loan with bad credit is definitely not out of the picture.

Since homes usually increase in value, the effects of bad credit when applying for a mortgage loan are not as substantial as say an auto loan. The interest rate will usually be significantly higher. For instance, you may be looking at 14.5 percent interest instead of a mere 6 percent that you would be able to obtain with excellent credit. The mortgage company may also require more continuous employment history for someone with bad credit.

When seeking a bad credit auto loan the effects may be significant. The loan company will usually charge you the maximum allowable in the state, which will normally range from 21 to 28 percent. They may also require you to have a significant down payment, anywhere from 10 to 20 percent. If you are unable to come up with a large down payment, you may be forced to purchase a vehicle from a buy-here pay-here car lot. These type of companies, because of their charge off rates, are often found to charge as much as twice the book value for a vehicle or more. They will also charge the maximum allowable interest rate. In effect, you may end up paying a higher monthly payment for a 10 year old vehicle than you would for a brand new vehicle, if you had good credit.

Personal loans are going to be hard to obtain if you have bad credit. You most likely will not be able to obtain one without some type of collateral. Perhaps you have a car that you own free and clear that you can use for collateral. Or it may be more convenient to get a second mortgage or home equity line of credit, depending on the amount of funds you need to acquire.

The same would be the case for a bad credit consolidation loan. Unfortunately, once you have established bad credit, most banks are going to want you to prove yourself for at least 24 months before taking a look at giving you a loan. They will want you to pay on time, or at least within 30 days, on all open revolving or installment loans showing on your credit report. They also would like for you to pay off any existing collections showing on your credit bureau.

Keep in mind, 24 months is really a short period of your lifetime and it is definitely worth waiting to get that better interest rate!