Higher Interest Rates/More Fees
 Even If You Qualify, You Will Pay More Fees And Higher Interest Rates
The fact remains, the lower your credit score, the higher your interest rate. This includes mortgages, auto loans, personal loans and credit cards. You also may be subject to increased insurance premiums, utility costs, or rent for an apartment. As the American economy improves, the general population is extended more credit and tends to spend more. In the face of higher gas prices, war, and lowering employment rates, we see more and more people with not only increased debt, but without the resources for paying off this debt.
On one side, more and more lenders have become more and more forgiving of individuals with bad credit by offering "sub-prime" credit card and loan products. This practice provides a means for those with bad credit to still get credit—at a premium cost. Sub-prime loans and credit cards often have interest rates that are much, much higher that that of "prime" loans and cards. Additionally, extra fees are often imposed for providing this service.
Here are some examples of how your credit score directly affects the interest rate you pay on car loans or mortgages:
A $20,000 Car Loan Paid Over Five Years
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Credit Status
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Interest Rates
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Payment Amount
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Cost of Bad Credit Over the Life of the Loan
|
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Good Credit - No Negative Items
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10%
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$424.94
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$0
|
|
Fair Credit - Some Negative Items
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14%
|
$465.37
|
$4,722.54
|
|
Bad Credit - Many or Severe Negative Items
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20%
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$529.98
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$8,593.30
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A $100,000 Car Loan Paid Over 30 Years
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Credit Status
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Interest Rates
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Payment Amount
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Cost of Bad Credit Over the Life of the Loan
|
|
Good Credit - No Negative Items
|
7%
|
$655.30
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$0
|
|
Fair Credit - Some Negative Items
|
9%
|
$804.62
|
$50,155.24
|
|
Bad Credit - Many or Severe Negative Items
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12%
|
$804.62
|
$130,791.63
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Predatory Lenders
On the other side, those with bad credit can be subject to "predatory lenders", those that take advantage of consumers in difficult situations by practically extorting money from their pockets. We see this type of predatory lending with payday loans, debt consolidation loans, or even car title pawning. While there is no law that prevents a lender from charging a higher than average interest rate, many states have enacted laws to cap rates for poor credit loans of all types.
Payday Loans
The Internet is littered with horror stories of individuals using the equity of only their next paycheck to borrow "enough to get by" only to realize later that their loan will never be paid off due to excessively high interest rates and exorbitant fees. One such tragedy details the story of a man paying an interest rate of well over 1800% on a loan amount of $250. Even worse is the fact that man has already paid more than $500 in interest without paying off any of the principal.
While many states are working to enact laws to abolish these practices, for now the status is "buyer beware." These types of businesses are little better than loan sharks.
Debt Consolidation Loans
If you've ever checked your e-mail, chances are you've been offered a debt consolidation loan at a "fantastic rate." The attraction is the convenience of reducing many different payments into one convenient loan. The downside comes when you realize this loan is actually costing you more money in higher interest rates and more fees.
The reality of these services is that the debt consolidation company is most likely not actually the ultimate lender. These companies merely serve to provide multitudes of banks with potential customers through a simple application process. The hardship to the consumer comes when there are application fees, other hidden fees, or higher interest rates.
Many have found debt consolidation loans to be the saving grace to reducing interest rates and overall debt. Just be sure to check all of the fine print up front and use a reputable lender.
Car Title Pawning
Believe it or not, there are companies that will allow you to essentially "pawn" your car, but still keep using it until the debt is paid. You surrender the title to your car and are allowed to borrow up to half of the car's current value. If you do not repay the loan, the broker finds your car, takes it and then sells it.
The real devastation comes in the terms of the loan. Some have reported interest rates on these loans to be as high as 830%, making it nearly impossible to pay off completely.
The good news is that as you work to build more good credit to offset negative items, you can increase your credit score. With a higher credit score, you can refinance loans to lower rates or negotiate rates on credit cards.
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