How to Avoid the Typical High-Interest Rates of Bad Credit Loans!
If you have bad credit and you need a personal loan, you might expect to face some pretty extreme interest rates. Wondering why that is and what you can do about it?
Well, we’ve got the answers for you!
How do interest rates work anyway?
Let’s start with the basics to make sure everyone is caught up. Any loan (other than one you might get from a friend or family member) is going to charge interest. Interest is calculated as a percentage of the total loan amount, or principal, and it’s how the lender makes a profit on the loan.
For example, if you take out a $1,000 dollar loan with a 5% annual interest rate, you’ll have to pay $50 in interest if you pay back the loan in one year, $100 if you pay off the loan in two years, etc.
Of course, that’s assuming simple interest, rather than compound interest. Check out the difference between those in our Financial Terms glossary.
Interest is how lenders make money which is (don’t forget) what lenders want to do.
Why does your credit score matter?
Many lenders view the world like a giant casino (where borrowers are the slot machines). Unlike regular slot machines which barely ever payout, borrowers payout nearly every time—just not that much, however. Maybe just a few cents per dollar put in, but the lenders know those cents are guaranteed, so they’ll keep lending (and collecting).
At the other side of the casino are slot machines that also payout a few cents but only half the time. No one is using these machines, because why would they? So management cranks the payout on those machines way, way up. Now they’re paying out 50 cents per dollar put in. And these lender-gamblers (lenblers?) start using them. Sure, they might not always get a payout, but when they do, it’s big enough to make up for their losses.
A borrower’s credit rating is essentially a prediction, based on past behavior, of how likely that borrower is to pay back their loan and interest. A lender assumes a lower credit rating means a borrower is less likely to pay back the loan, so they’ll only lend to that borrower if the payout is big enough to make up for all the other lenders that won’t pay back. So how do they ensure a bigger payout? By raising up those interest rates.
But you’re not a slot machine, you’re a human being!
Of course, a good lender shouldn’t see their borrowers as “slot machines.” A good lender should be willing to do whatever they can to get you the best rate possible, even if it means they might end up collecting less on your personal loan. A good lender also knows that a credit rating isn’t the only way to judge whether someone can pay back a loan or not. So how can you find a good lender?
Nationally recognized credit expert Jeanne Kelly (@creditscoop) says, “Make sure you do your research on the company and the account you are applying for.”
Avoid lenders who perform “hard credit checks” which can ding your credit. Instead, you’d be better off seeking a lender who performs a “soft credit check,” which will not appear on your credit report. You should find a lender who gives you the best rates they can with your situation and is willing to work out a payment plan you can handle.
Other ways to look for the good lenders include checking out their online reviews. Are their customers happy with them and their products, or do they feel scammed?
Also, check the Better Business Bureau ratings. A high accreditation will help identify legitimate businesses, while bad reviews (or no accreditation) can signal dangerous lenders. James Sinclair, a manager at Trade Financial Global (@tradefinglobal) warns: “In relation to spotting a dangerous lender, look at the clauses they add to an agreement. Especially in relation to a missed payment- what will the effect be? What is the penalty? Understand the downside risk. It is important to understand the documents you are signing.”
Summing it all up:
Kelly suggests: “If you are tired of having no credit or a low credit score, start to rebuild with a secured credit card that will report to Experian, Equifax & Trans Union. You can start to build a good history on the new account and keep balances low.”
If an emergency comes up before your credit is fixed, be sure the lender you work with doesn’t just see you as a slot machine. Find a lender who will work with you and report your payments to credit agencies, so you can get a more affordable personal loan to help build your credit.
Jeanne Kelly is an author, speaker, and coach who educates people to help them achieve a higher credit score and understand credit reporting. #HealthyCredit is her motto. As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge, Jeanne Kelly is a nationally recognized authority on credit consulting and credit score improvement.
James Sinclair, is a manager with Trade Finance Global. Trade Finance Global (TFG) is an international company focused on structured debt. They use their relationships with banks and alternative finance houses to structure and negotiate trade lines for their clients. There are more details online at TradeFinanceGlobal.com