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How Does Bad Credit Affect My Loan?

As you miss important bill deadlines and max out your credit cards, it's easy to forget what is inevitably happening to your credit. The higher the number of negative accounts you have on your credit report, the harder it is on your credit. Your credit score will also act as a calling card to financial institutions, and it will tell them rather quickly that you are not responsible with credited finances.

One of the many things that a low credit score makes it hard to get is a loan. While it's not impossible to obtain a loan with a bad credit score, you will quickly find that it is difficult to find the terms and interest you may be hoping for. What follows is an in-depth look at how bad credit affects obtaining a loan.

How the Terms Vary

Loans come with terms that dictate a number of details concerning the repayment process, such as what will happen if you don't pay, the collateral you'll use to support the loan, and much more. The terms of loans granted to borrowers with bad credit are often drastically different from those granted to borrowers with clean credit scores.

For example, a loan offered to someone with a bad credit score are the fact that it is probably short term, secured, and has a smaller credit allowance. On the other hand, loans given to those with good credit often have longer repayment plans and terms, don’t have to be secured by collateral, and have larger credit allowances.

Rates for Loans Given on Bad Credit

The rate you'll be looking at for your bad credit loan can range anywhere from 15-25%. Bankruptcy and collection accounts often result in higher rates than other causes of a low credit score, such as lack of credit history or simply carrying too much debt.

Many financial lenders will try to tempt borrowers with introductory rates that start anywhere from 0-5% for a number of months or years. However, the small print almost always states that the rate will skyrocket to 15-20% if it is not paid off during the introductory period. In other words, don't be fooled by these attractive rates and easy approvals. Lenders do not expect that most people to be able to pay off their loan or line of credit in time before the real rates kick in.

Improving Credit After Taking Out a Loan

You more than likely will also experience changes to your credit score as you repay your loan. In some cases, borrowers' credit scores will go up, and in some cases the loan terms and rates should change along with it, especially with credit cards. For personal loans, however, the only feasible option is refinancing. Refinancing is the process of replacing an original loan with a brand new one that has better rates and terms. Should your credit score improve considerably after taking out a loan on bad credit, consider this option as a way to negotiate a much more comfortable loan agreement.

Overall, you should wait until you have improved your credit score considerably before taking out a loan if you can. Your rates and other terms will be based heavily off of what the lender sees on your credit report and how much of a risk they perceive you to be. Don't lock yourself into a loan that entails difficult terms to stick to unless you don’t have another option.

Last Updated: March 07, 2016