The Interest Rate Issue On Bad Credit Loans By Amanda Hash At Isnare.com Ezine Articles

When you think about bad credit loans there are many things that remain unclear about them. There is no exact category of loans or a clear description of what they are. Actually, there are many different loan types that are referred to as bad credit loans. And the main issue that raises controversy around bad credit loans is the interest rate charged.

The interest rate issue raises many questions that need to be answered in order to understand what bad credit loans are and under what conditions a bad credit loan can be to your advantage. Otherwise you may let pass by a good opportunity to improve your credit or get trapped into the vicious circle of bad credit loan debt.

Interest Rate and Loan Type

If the loan is secured, even if you have bad credit, you will be able to obtain a reasonable interest rate that may be one or two points over the average rate of secured loans but still affordable. This is mainly because the collateral reduces the risk involved for the lender compensating for the greater risk that lending to someone with low credit score or bad credit history implies.

Unsecured loans on the other hand, lack collateral and thus involve a greater risk which translates into a higher interest rate. Without the collateral acting as an anchor, the interest rate will skyrocket on unsecured loans if you have bad credit. Thus, though it is possible to get unsecured personal loans for bad credit applicant’s, the interest rate you have to pay is very high.

Interest Rate And Credit Score

Ok, your credit score is low, your credit history is bad, but how low and how bad? For a lender, an applicant with some delinquencies like late payments or missed payments is definitely not the same as someone with a past bankruptcy or several defaults. Though these loans are meant for people with bad credit, your credit score and history will still define the interest rate you will have to pay on the loan.

Moreover, in certain circumstances it may also imply a decline on your loan application if there are recent serious delinquencies like a default on a big loan or an ongoing bankruptcy process. In any case, the interest rate charged for financing the amount borrowed will depend on the applicant’s credit score because the credit score is reflecting a measure of the risk implied in the financial transaction. And the more risk involved, the higher the interest rate has to be in order to compensate for the probable loses.

The Co-signer Alternative

Those who cannot offer collateral in order to reduce the risk and thus lower the interest rate charged, do still have an alternative to lower their monthly payments. Offering a co-signer can also eliminate a good portion of the risk and let the lender offer more competitive interest rates and more advantageous loan terms.

The co-signer is a personal guarantor of the loan repayment. The co-signer is obliged to the lender as the main borrower is and in case the later defaults, he will be forced to start repaying the loan on his own. However, in order to get the lender to reduce the interest rate charged, the co-signer should have a good credit score or at least, a better one than the main applicant.

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