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Bad credit sounds like the end of the world to some people. It is definitely heartbreaking and feelings of guilt are very common, yet this does not mean that the world has come to an end. There is a certain myth involving people with bad credit: that they will never be able to pay it off and will never be eligible for any other loan in their lives.
Lenders also keep in mind that in giving you a loan they are taking a risk. That brings up the interest rate: higher the stakes, the higher the interest rate. Though you will not be comfortable with the interest rate, you will still be able to get credit for yourself even if you have bad credit. An interest rate is calculated on the basis of the general interest rate in the country and the stakes or risk involved in a specific loan. Most financial institutions follow the prime rate given by the U.S. government, but they just use it as their base rate. The actual rate could be a point higher or lower than that. The prime rate is only for their esteemed customers; the ones with bad credit are given higher rates. Other than the prime rate, the other base rates are LIBOR (London Interbank Offered Rate) and the treasury bill rate, which is issued by the U.S. government on bonds for a number of years. Prime rate controls the credit cards and car loans, whereas the mortgage loan rates are dictated by the other rates. There is an addition to these rates where a percentage point above the prime rate and about 10% above the LIBOR are interest rates for people with a good credit rating. For cases of bad credit, there are more add-ons. A home equity loan is given only when the security of a home is placed with the lender. Your house becomes the collateral, which can be recovered after you have paid your loan in full. An unsecured personal loan is given at approximately 6% above the prime rate normally, and with bad credit, this rate can shoot up. This may sound like an atrocity. Well, lenders need some security to lend you the money and earn from your bad credit. How Can I Set Things Right? It is not easy and quick to rebuild your credit. But there is no point in losing hope and crying over spilt milk. It's a gradual process, but once your credit report gets better you can maintain the good trend. |
