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It used to be that if you defaulted on a loan, be it secured or an unsecured loan, you wouldn't be able to get new credit—or if you could, you paid insane fees and through-the-roof interest rates. But once the finance industry realized there were big bucks to be made in what is called the sub-prime lending market, that all changed. The sub-prime lending market is made up of people who, for whatever reason, have tarnished credit. It may be something as simple as a few late payments on a credit card to having a car repossessed. Whatever the case, lenders now are more willing to make what are considered high risk loans to this group. Because people with low credit scores are much more likely to default on a loan as those with higher scores, lenders charge up to twice the interest rate they would charge someone with good credit for the same exact loan. This is to compensate the lender for taking the extra risk of lending money to an individual with a low credit score. Statistically, the lender is much more likely to be left holding the bag on a loan when the debtor has a low credit score versus someone with a higher credit score.
Some essential personal loans advice is to familiarize yourself with the credit report agencies. There are three major credit reporting agencies:
When you apply for credit in the form of a credit cards, personal loans, mortgages, or auto loans, the lender will pull your credit report to see if you are credit-worthy. Credit scores range from a low of 300 to a high of 850. The higher your score, the better credit terms you qualify for. Loans to individuals with scores over 700 are considered to be low-risk loans, while loans to individuals with scores below 620 are considered to be high risk loans. The lower risk you are considered, the better terms you will be offered, and vice-versa.
If you're taking out a $25,000 home equity line of credit for twenty years and have a credit score of 700. You qualify for interest rates as low as 5.5%. That means you'll pay just over $16,000 interest for the loan over twenty years. If you have a credit score of 620, your rate may be as high 9.75%, and you could end up paying as much as $32000 in interest for the same $25,000 loan. It pays then, to use your credit responsibly and always pay on time.
There are companies out there that will charge you hefty fees to "repair" your credit. What they don't tell you is that time alone can heal many of the blemishes on your credit report. Late payments age off your credit report. If you are paying your bills on time now and do so consistently, your credit score will improve with each month of on-time payments. Even car repossessions or credit card balance discharges eventually "fall off" your credit report after seven years while bankruptcies are cleared after ten years.
If you have bad credit personal loans will be very expensive—assuming you can even get approved. The best thing you can do is make your current payments on time for at least six months, and better if you can do it for a year, before you apply for any new credit.
An unsecured loan is any credit arrangement you have that is not backed by personal property. For example, a credit card is an unsecured loan. A bank agrees to allow you to borrow a certain amount of money based solely on your promise to repay the money plus interest. If you can't pay your mortgage the bank takes your house. If you can't pay your auto loan, the bank repossesses the car. If you break the agreement you have with your credit card company, the bank has nothing to lay claim to—except your reputation, of course. That's where your credit score comes into play.
Credit card companies can and do report both on-time and late payments to the credit reporting agencies. The next time you go to apply for a loan or credit card, the lender will pull your credit report to determine if you are a good risk. That's why it is always important to pay your bills on time and according to the terms of your agreement.
*If you are considering taking out a personal loan or other form of credit, the best personal loans advice that you can get is to know your rights.
The Federal Reserve Board's consumer information division publishes the Consumer Handbook to Credit Protection Laws. In it, you can read about your rights when you apply for credit such as a credit card or other unsecured personal loans, what to expect when you do apply, how your credit report affects your credit options, and what to do if you feel you are being discriminated against. There's also information on mortgages and car leases and loans. You can read the guide online at the Federal Reserve Board's Web site in the consumer information section.
You pay your bills on time. Your available credit is far from the limit. You have a solid employment history. And your debt to income ratio is well within lenders' guidelines. Why then, are you being turned down for unsecured personal loans or offered exorbitant interest rates? It could be because there is inaccurate negative information on your credit report.
Some commonly overlooked personal loans advice is to monitor the information in your credit report on a regular basis. Get a copy of your credit report at least twice a year. If you find mistakes in the information, you can dispute it with the credit reporting agency and the agency is obligated to fix it.
To find out how to correct mistakes on your credit report, visit the consumer money section of FirstGov.org's Web site. There you will find information on how to dispute credit report errors, plus a ton of other useful information on managing your finances.
Back in your parents day, if they needed a loan it meant a trip to the local bank. Nowadays, your lender can be located on the other side of the country. Thanks to the Internet, you can compare fees, rates, and loan terms online. You can check with the Better Business Bureau to see if there are any complaints against a certain lender. You can apply for personal loans online and get pre-approved in a matter of minutes.
Many traditional, bricks-and-sticks banks have Web sites and entire departments devoted to processing online applications. There are also many non-traditional banks that only offer services online. The Bancorp Bank is an example of such a bank. If you do your research and know the lender is legitimate and reputable, there is no reason not to apply for loans online. Just make sure you are dealing with a legitimate financial institution.
There are many, many online lenders that charge exorbitant fees and outrageous interest. If you want to find out what fees are reasonable and what the going rates are, check out Bankrate.com's rate monitor. You can plug in your zip code to find rates for lenders that serve your area.
No credit is, in some ways, as bad or worse than having bad credit. Generally speaking, owing money to someone else is not a desirable position to be in. The one exception to this may be a mortgage, which carries with it certain tax benefits. So even though you may not want to carry debt, there will inevitably come a time in your life when you will want or need to apply for credit cards or personal loans. It is important before you get to that point to have built a credit report that shows a track record of responsible bill paying and employment. This can be one of your best financial assets.
Want some personal loans advice? Apply for a low-interest rate credit card. Use the card regularly, but pay the balance off immediately. Once you've proven you can handle a credit card, apply for a small personal loan and pay it according to the terms of the agreement. If you do this over time, you will show future potential lenders that you are a good risk and that you know how to manage your money. When you need an auto loan or a mortgage, you will qualify for better terms, which will save you a bundle in the long run.
A secured personal loan is a loan that is backed by collateral. Collateral is your personal property. The two most common types of secured loans are mortgages and auto loans. If you fail to pay either your mortgage or auto loan according to the agreed terms, the lender has the legal right to repossess the property.
Secured loans are generally for higher amounts that unsecured loans, such as credit cards or personal loans, because the lender has more to lose if you default on the loan. Other types of secured loans include home equity loans and lines of credit, which are essentially second mortgages secured by your home; boat loans; and business loans in which you pledge your business's assets.
Predatory lending is when a lender targets a certain group and markets personal loans, auto loans, or mortgages to that group that cost more. There may be higher application fees. You may have to pay more fees up front than ordinary to get a cheaper interest rate. The interest rates themselves may be outside the range of what is normally considered acceptable even for high risk loans. Your best defense against falling prey to predatory lending is to know your credit score and to shop around for the best rates and fees. Even people with bad credit can get reasonable terms on personal loans and other types of loans.
There are laws against predatory lending. If you suspect you have been a victim of predatory lending, you should report it to your state Attorney General's consumer protection office immediately. You can also contact the Federal Trade Commission (FTC), which works to prevent unfair business practices, by calling 877-FTC-HELP (877-382-4357) or visiting the FTC's Web site.
|Sheri Ann Richerson|