How many times have you seen the advertisements for loans for consumers with bad credit? Seems as if they are every were these days. Over the past two years many consumers have seen their credit ratings fall due to job losses or because they have over extended themselves. Now it is much more difficult to find an installment loan even if you have the best credit rating simply because the economy has had such a rough time in 2009.
A bad credit rating can have a dramatic impact on your installment loan. For example you may not even be able to find a lender who is willing to lend a loan to you or if you can, they will offer such high rates of interest and tight terms it may not be worth your while to take on the additional debt. So how does bad credit impact your installment payments?
Every installment loan you take out whether it is a car loan, a furniture loan, a debt reduction loan or even a mortgage consists of the same factors.
They all have :
Principle: This is the actual amount of money that you are going to borrow. It will consist of the money you need plus any fees or broker expenses necessary to process the loan. Always examine what fees are being added on to the principle amount to see the true cost of the loan in addition to interest charges. In some cases you may only be eligible for a specific amount for your loan, so these fees are then deducted from the amount you will receive. You might receive less than you asked for simply because of your bad credit rating and your perceived ability to repay the loan.
Interest Rate: The interest rate is the rate at which interest will be calculated. Obviously the lower this number is, the less it will cost for your loan over the life of the loan. A bad credit rating will also tend to cause lenders to increase the interest rate, making it more expensive for you to borrow any money. Consumers must also pay attention to how often the interest is calculated. Many loans regardless of the type of installment loan, are calculated every 6 months. This means that they calculate the interest you will pay using the remaining principle amount at 6 month intervals.
Some credit cards do this on a monthly basis and payday installment loans might do this calculation on a weekly basis. The net result is the more often interest is calculated, the more it is going to cost you. Always push for 6 months and avoid any installment loans that use shorter intervals to calculate interest. Pay off your credit cards as quickly as possible, since they have the highest net interest rate and are very expensive installment loans.
Term: The term is the length of time you will take to pay your installment loan down to zero. Mortgages come in all terms with some as long as 25 to 35 years, while car loans may be one year to a maximum of five years. Some loans that are intended for emergency funding may only have a term of 30 days.
Regardless of what the term is that you choose, always review whether you will be able to complete all of the payments including interest and fees within this time frame. Failure to do so will require at the minimum a renegotiation of the loan usually at some cost to you the consumer. If you cannot renegotiate or just cannot repay the loan, then your credit rating will suffer even more and make it more difficult in the future to take out an installment loan.
Lastly the term of you installment loan will have a big impact on the monthly payment value. A shorter term means a large monthly installment payment, while a longer term reduces the monthly installment payment. Of course installment loans with longer terms will actually cost more since it takes longer to repay them, hence the interest charges are larger. i.e.. the total cost of the loan will be higher.
Monthly Installment payment: The above three factors, the principle, the interest rate and the term all combine in a mathematical formula to arrive at your monthly installment loan payment. This is the amount you must pay each month. If your principle or interest rate increases, your monthly payment will increase. On the other hand if the term increases, your monthly payments will actually decrease since you are taking longer to repay your installment loan. The amount of interest you pay over the life of the loan will increase as a result.
Once you understand what each of these items mean and their relationship, consumers can quickly understand why they have bad credit and why they make it so hard to get an installment loan. If you have a bad credit rating, then they the banks, are really saying that you are a high risk customer and may not repay the loan. They will either deny the loan to you or they will increase the interest rate and shorten the term to reduce the risk of possible defaulting on the installment loan.
Higher interest rates and shorter terms make the monthly installment payment a lot higher and perhaps out of reach for many consumers based on their budget or income levels.
As a rule of thumb your total monthly payments should not be any higher than 30% of your total monthly income after taxes. If you have a combination of mortgage payments, installment loan payments and possibly credit card payments that are larger than 30% of your after tax income, you definitely need to take some action to fix this situation.
Anytime you get over this amount, consumers will find it very tough to meet daily living expenses and will have to cut corners until they can retire loans and eliminate payments of this type. If you want to avoid a negative impact on your credit rating always repay your installment loans on time every time.
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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