Most of the lenders like to give their money to safe clients and take minimum risk. This benefits people with good credit since all the privileges and preferences are for those with good credit, rather than those with bad or no credit. It is easier for them to obtain a new credit card, home mortgage and other loans. That does not mean it is the end of the road for those with bad credit. Bad credit loans are a good option that can be also used to clear a bad credit history.
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There is good news for people with bad credit; they can avail bad credit loans even a day after they file for bankruptcy. There are several options available for those with a poor credit score such as a new credit card, or a home mortgage loan. Moreover, short loan amounts can be easily obtained even without credit checks.
Yet, there is one thing that has to be realized by those with bad credit. They will not be treated at par with the ones who have a good credit rating. Lenders will be different than standard lenders and they will not be able to get similar interest rates. Actually, chances are that the interest rate charged will be considerably higher, sometimes even doubling the rates charged for traditional loans.
Interest Rate
The interest rates on bad credit loans are calculated on the basis of the general rate of interest that is prevailing at the time of taking a loan. The interest rate is then raised by the lender on the basis of the risk that is involved the transaction. The interest rates on all the loans in the United States are calculated on the basis of the U.S. prime rate.
The same goes to the interest rates of credit cards and bad credit loans. Most of the banks and financial institutions give their very privileged customers a loan on the prime rate. By doing so, they are probably losing money but the idea is to keep the customer and compensate with other fees and costs.
The interest rates on bad credit loans are high. They are higher in case they are unsecured. Sometimes, the interest rate is as high as 6 to 7 percentage points above the prime rate. The reason for high interest rates is very genuine. A lender will prefer anyone with a good credit history and give him/her a reasonable interest. But, when you are putting your money where there is no guarantee of return, the interest rate goes up.
This works like an incentive for the lender. Otherwise there is no reason for lending to someone when there are more odds against timely repayment.
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