Why Bad Credit Loans Cost More

The moment you think about getting a loan, the first thing you should do is get your credit report from any of these three credit reporting agencies: Equifax®, TransUnion® and Experian®. You are entitled to one free copy from each agency every year, which gives you the benefit of comparing the reports and making sure there are no discrepancies in any one.

Let’s talk about your FICO score. This score is generated by the credit bureau based on your credit information, which involves your income, savings, spending and debts. The cleaner your report with all payments made on time, the higher your FICO score will be. Let’s have a look at what categories different FICO scores fall in.

According to Experian, these are the latest ranges of FICO scores:

Exceptional: 800+

The approval process for any loan or new credit will be a breeze for you. You will get the best pick of interest rates and lenders will be more flexible with the loan terms.

Very Good: 740 to 799

Again, you will not find any difficulty in the loan process and you will get a deal with better interest rates.

Good: 670 to 739

Most of the borrowers in the US fall in this range. A good credit score makes you an “acceptable” borrower in the eyes of banks and private lenders. However, they will still do a lot of background checks to make sure that you will be able to repay the loan.

Fair: 580 to 669

A fair credit score puts you in the “maybe” zone. 90% chances are that your loan application will be rejected and even if a private lender accepts the loan application, they will charge a high interest rate.

Poor: 579 and Lower

This credit score puts you in the danger zone. One way or another, your loan application will be rejected and if by chance it does gets accepted, apart from the exceptionally high interest rate, you will have to pay a deposit or a fee.

So, why is that bad credit loans cost more?

Well, the answer is plain and simple: your credit history shows that you do not make on-time payments and your previous debts haven’t been paid in full yet. This makes the lenders vary of your situation and whether they will be able to recover the loan from you on time or not. This is why they charge high interest rates, so that they can get a certain sum of the loan in the first few monthly installments.

Here’s how the FICO score works on loans:

Let’s say you are borrowing $200,000. Your FICO score is between 760 and 850, the APR you are charged is 4.322% and it’s a fixed rate mortgage with a time period of 30 years.

  • Monthly Payments: $992
  • Total Interest: $157,238 (In 30 years)

Now let’s assume that your FICO score is between 620 and 639, with the same loan amount and time period.

  • Increase in Monthly Payments: $196
  • Monthly Payments: $1,188
  • Total Interest: $227,565

This is why your FICO score is considered the credit king when it comes to applying for a loan. The best way to improve your credit score is to clear your debt and cancel your extra credit cards. More than two will always cause a problem. Then, work hard on making timely monthly payments on the utilities. It can take anywhere between 9 months and 5 years to improve your credit score. So, make sure that you aren’t making any rash purchases that will hurt your future chances of getting a loan for your dream car or house.

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