Being hit with unexpected expenses and not having the cash on hand to cover them can be stressful. One practical option in such a situation is to consider obtaining a personal loan to tide over the crisis. However, your credit score can play a pivotal role in how much that loan can cost you, especially if you have a bad credit history. This post aims to explain how much an extra adverse credit score personal loan could cost, and what you can do to mitigate its impact.
The Pricing Factor: Credit Scores
To evaluate the cost of the loan, it’s crucial to understand the role of your credit score.
Bad Credit And High-Interest Rates
Your credit score is an indispensable factor that lenders use to assess your creditworthiness. Poor or bad credit scores can potentially signal high-risk borrowing to lenders, resulting in them offsetting the risk by charging higher interest rates. In essence, a bad credit personal loan may come with a steep price due to increased interest charges.
Additional Fees And Charges
Besides high-interest rates, having bad credit can also incur additional costs such as loan origination fees and late payment penalties. These charges, though may seem trivial at first, can add substantial amounts to your total loan cost in the long run.
Calculating The Cost: Weak Credit Personal Loan
Here, we give a realistic perspective on how your bad credit could affect the cost of a personal loan.
- Potential Costs: Imagine having a credit score below 600, placing you in the bad credit category. Given such a score, your weak credit personal loan interest rates could range anywhere from 20% to 36%. For a loan of $2,000 to be repaid within two years, this means you may end up paying an extra $400 to $720 compared to borrowers with better credit ratings.
- Lesser Known Costs: Additionally, consider the potential origination fees, which are usually a percentage of your loan amount. This expense, along with late fees, could push your total loan cost even higher.
Mitigating The Impact: Tips To Lower Your Loan Costs
Learning ways to reduce the financial impact associated with bad credit personal loan is just as crucial.
Improve Your Credit Score
As far as possible, it is always helpful to work on improving your credit score before applying for a loan. Paying bills on time, reducing outstanding debt, and rectifying any credit report errors can gradually improve your credit score, and hence, get you a better loan deal.
Compare Loan Offers
Don’t shy away from shopping around and comparing loan offers from different lenders. Some lenders are willing to negotiate terms, allowing greater flexibility and potentially lower interest rates.
Consider A Co-Signer Or Collateral
Opting for secured loans or considering a loan co-signer can influence lenders to offer you better loan terms, even with bad credit.