The High Cost of Bad Credit

Mortgages

Buying a house is hands down one of the most significant purchases you’ll ever make in your life. What else would you spend a potential six figures on?

And because the price tag is so large, it means that even a small fraction of an interest point can cost you thousands of dollars or more throughout your mortgage. Furthermore, your credit score also affects how much of a down payment you’re required to make. Let’s break it down with an example.

FHA Loan Example

Sarah purchases a home priced at $175,000. She takes out an FHA loan, and because her credit score is 745, she qualifies for a low interest rate of 3.45%. Not only that, she only has to make a 3.5% down payment.

That payment comes to $6,125, bringing her loan amount down to $168,875. Then, using a mortgage calculator, we find that Sarah’s monthly principal and interest payment comes to $754. So she’ll spend a total of $271,303 over the life of the 30-year mortgage.

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Now let’s look at Brad. He buys a similar house for the same price as Sarah and also takes out an FHA loan. However, he has a low credit score of only 575.

He still manages to qualify for the loan but must pay 10% of the home price as a down payment, which amounts to $17,500. That’s well over $10,000 more than Sarah is required to pay. Plus, his interest rate jumps up to 5.25%.

Even with the higher down payment, Brad’s monthly payment is still $870, and he will pay a total of $313,099 on his 30-year mortgage. Getting the same price home with the same type of loan ends up costing Brad over $53,000 more than Sarah, simply because he had bad credit.

That may seem like a lot, but Brad is lucky to get a mortgage at all in this hypothetical situation. Most conventional lenders cut off their approvals around 620, and FHA lenders start to weed out applicants with a credit score of 580 or less.

Renting an Apartment

Bad credit also impacts whether you can rent an apartment. More and more landlords now require a credit check as part of the screening process for tenants. If you live in a competitive area, having a bad credit score could become a roadblock to finding a house or apartment.

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Frequently Asked Questions (FAQs)

There aren’t many lenders that accept applications from borrowers with credit scores of 550. However, there are lenders who allow for a co-signer—someone who agrees to repay the loan if the primary borrower cannot—which can help you qualify for a loan with a score of 550. If you know you have damaged credit, look to improve your credit before applying for a personal loan.

A lender typically determines your loan limit based on your creditworthiness and income. The largest limits are reserved for high-qualified borrowers. If you have bad credit, you can expect to receive near the minimum loan limit your lender offers. If you need to borrow more money, consider improving your credit score prior to applying.

If you know you have bad credit and are preparing to apply for a loan, take time to improve your credit score. Some common ways to do that include paying off your existing debts, reducing your overall credit usage, disputing any errors on your credit report and reducing the number of new credit applications made in a short period of time.

While most loans require a credit check, there are some loans that don’t. Instead, lenders qualify applications based on the applicant’s ability to repay the loan. Lenders will likely also require collateral—a personal asset used to secure a loan and one the lender can repossess if the repayment terms are not met. You can get no-credit-check loans through payday loan stores, auto title lenders, online lenders and pawn shops.

According to our evaluation of 18 popular lenders, Upgrade offers the best personal loans for bad credit. It requires a minimum credit score of 580, giving those with bad credit an opportunity to secure the financing they need. Interest rates range from 7.99% to 35.97%, and with bad credit, you’ll likely land near the maximum interest rate.

Whenever you get a bad credit personal loan, you take on some level of risk. While most personal loans are unsecured, meaning you don’t need to provide collateral to secure the loan (and therefore avoid losing a personal asset if fail to meet the repayment terms), you still risk damaging your credit score if you don’t keep up with your monthly payments.

What Are the Types of Loans for Bad Credit?

Before choosing a loan for bad credit, it’s essential to understand the types of loans you might be able to get, what it takes to qualify, and how much it will cost you. Just because you have bad credit doesn’t mean you can’t get funding. Make sure to look for a lender with transparent pricing and with reasonable repayment terms that allow you to pay off the balance in no more than five to seven years. The types of available loans for bad credit vary based upon why you need the money, just like any other loan. Some of the most common types of loans for bad credit include:

  • Secured loans: There are many secured loans for bad credit, including mortgages, auto loans, home equity loans, and home equity lines of credit. A secured loan for bad credit is appropriate if you need to use the money to buy a car or a house, or if you want to use the money to repair or improve your home. Secured loans are usually the least expensive type of bad credit loan since it’s backed by collateral. 
  • Unsecured loans: Many lenders offer unsecured personal loans for bad credit, including banks, credit unions, alternative online lenders, and peer-to-peer (P2P) lenders. You won’t need to provide any collateral for this type of loan (e.g., your car or home), and these loans are usually repaid in no more than two to seven years. However, since there’s no collateral, an unsecured loan is often more expensive than a secured loan.
  • Credit cards: There are many different credit cards for bad credit. Some of these credit cards even come with features to help you rebuild your credit. This type of bad credit loan can be helpful if you need to have a credit card on hand and you’re can pay it in full every month. Keep in mind, the APR on credit cards is usually high, and so you should do your best to repay the balance as quickly as possible to avoid high borrowing costs.
  • Cash advances: If you need cash, many credit card issuers offer cash advances so you can access the funds you need quickly. Banks and other alternative online lenders also sometimes offer short-term cash advance loans. Cash advances are more expensive than secured or unsecured personal loans and often carry very high-interest rates. 

Keep in mind that payday loans come with extremely high-interest rates, making them risky loans that are extremely difficult to repay. It’s easy to get caught up in a cycle of using payday loans. For these reasons, it’s best to avoid payday loans and seek another funding option.

Long Term Affects of Bad Credit

In our example above, you were able to see the short term affect bad credit can have a person. Nancy has to pay so much more for the exact same products but what does that mean in the long run? Well, if they make about the same salary, the person with bad credit has less “fun” money at the end of the month. Money that could be spent on going out to dinner, taking a vacation, or maybe just investing in a retirement account. When you have bad credit, more than just your wallet is affected. Bad credit affects your family, your well-being, and your overall quality of life.

People who have bad credit never seem to get ahead of the game because they are spending much more for the same things. That is why is it so important to work on increasing your credit score and cleaning up your credit. Removing negative items, consolidating loans, paying off debt, and paying your debts on time are all things each of us can work on each and every month. A little effort can go a long way.

Insurance

At some point in your life, you’re going to need insurance. Whether it’s car insurance, life insurance, renter’s insurance, or homeowner’s insurance, it’s hard to avoid paying those monthly premiums to insure our valuable possessions. And unfortunately, just how much you pay each month depends partly on how strong your credit score is.

Insurance companies assume that if you are irresponsible with your money, you might also be irresponsible while driving or taking care of your home or health.

95% of car insurance companies and 85% of home insurance companies use credit when determining premiums. Even if you don’t intend to use credit specifically, your credit score still follows you in other ways.

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Renting an apartment

There are two ways bad credit can hurt you when you apply to rent an apartment.

First, the landlord may deny your application due to your credit. This will depend on both what credit score the landlord will accept and also the credit scores of any other applicants for the apartment. If another applicant has a higher credit score, odds are that the landlord will choose them.

If you are approved, you'll likely need to pay a larger security deposit. The advertised security deposit is typically on approved credit, meaning you only qualify for that if your credit is good enough. With bad credit, your deposit may be double that amount or the equivalent of another month's rent.

Where Can I Get a Personal Loan with Bad Credit?

Getting a personal loan with bad credit can be a challenge. Still, you may find multiple lenders willing to do business with you (albeit typically at a higher interest rate). If you're searching for personal loan options with bad credit, there are two primary loan sources you may want to consider.

  • Online personal loans for bad credit: Online lending networks take your loan application and connect you with lenders who may be willing to approve you for a personal loan. Often, you can submit one initial form and compare offers from multiple lenders.
  • Direct lenders for bad credit personal loans: Direct personal loans come straight from the financial institution where you’re approved. These may include local banks and credit unions, online banks, and online direct lenders. If you have bad credit, it’s generally best to apply only with direct lenders that are willing to do business with credit-challenged borrowers.

You can find a combination of the best personal loans for bad credit from both types of sources in the guide above.

What to know about your credit score and securing a loan

When lenders give you money, they need you to pay back the money so they make money instead of losing it. Lenders tend to view people with less optimal credit to be riskier, so people with lower credit tend to see higher APRs. 

Auto loans

Auto loans are available to consumers with almost any credit score, but you'll pay much more if you don't have good credit. Let's look at what your rates would be with a credit score of 720 or higher, which qualifies you for the lowest auto loan interest rates, compared to any score below 590.

For this example, we're going with a 60-month new car loan for $20,000 and using rate estimates from MyFICO.

720 or above:

  • APR: 567%
  • Monthly loan payment: $373
  • Total interest paid: $2,408

589 or below:

  • APR: 188%
  • Monthly loan payment: $499
  • Total interest paid: $9,945

Total cost of bad credit: $126 per month and $7,537 over the life of the loan

Why consumers with bad credit pay more

Lenders use a method called risk-based pricing to determine what to charge on a loan or credit card. People with good or excellent credit typically receive the lowest interest rates because they’ve proven over time that they’re likely to pay back the debt in full.

On the flip side, people with bad credit may have struggled in the past to keep up with their payments. As a result, lenders typically charge higher interest rates to compensate for the added risk they’re taking on working with a bad-credit borrower.

Of course, not everyone with bad credit got there because they’re irresponsible. It can also be a product of circumstances that are out of your control, such as divorce, medical bills, unemployment and more.

But, unfortunately, most lenders don’t have the ability to consider every situation individually, so they rely heavily on your credit score and the information contained in your credit report without the full context.

Learn how to read your credit report here.

Current Local Thirty Year Mortgage Rates

The following table shows current local 30-year mortgage rates. You can use the menus to select other loan durations, alter the loan amount, change your down payment, or change your location. More features are available in the advanced drop down

What is a bad credit personal loan?

When you apply for a loan, lenders will look at your credit score and credit history to determine how much of a risk it is to them to lend you money. Having bad credit is when you have a low credit score, which can be caused by things like short credit history, late payments or maxed-out credit cards. If you have bad credit and need a loan, you may need to narrow your search to lenders that offer loans for bad credit. These loans are either secured (backed by collateral like a home or car) or unsecured. Interest rates, fees and terms for these types of loans vary by lender. Various banks, credit unions and online lenders offer loans to those with poor credit, but the threshold for what’s considered a “creditworthy borrower” varies by institution. Some lenders have stricter requirements than others, which makes it important to shop around for the best option.

It’s possible to get a loan even if you have bad credit. While your credit score will keep you from getting a great APR (annual percentage rate), you can still find interest rates that are much lower than with options like credit cards or payday loans. Our recommendations for the best bad credit personal loans have flexible eligibility requirements and relatively low rates for the credit band.

Summary

A bad credit score has a major financial impact across multiple areas of your life. Instead of worrying about past money experiences that may be lingering on your credit report, focus on the positive changes you can make today.

Get better at managing your money by creating a system to pay your bills on time. Also, work on building an emergency fund so you can avoid high-interest debt while you continue to improve your credit. Over time, all of these actions will not only lead to a better score but better financial footing as well.

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