Bad credit financing: What to look out for

Jul 28, 2011

While it is possible to get financing with bad credit, there are some disadvantages. The major disadvantage is that there are some lenders who are looking to take advantage of people who cannot get credit anywhere else. Fortunately, if you take your time before jumping into a loan to make sure you read all of the terms and conditions, you can usually spot these lenders before you sign a contract with them.

Very high interest rates

You can appreciate that lenders need to make more money off of you to help offset the risk they are taking by lending to people like you. However, you also need to realise when they are asking too much. People with a credit score that is less than 500 have a historical default rate of over 80 percent. So, the other 20 percent of people must help make up for the revenue that the lender will lose to those who default. If the lender is offering you an interest rate that seems excessive, then it is probably time to look somewhere else.

Very high fees

Another way lenders take advantage of those with poor credit is with very high fees. You may get a credit card that has an annual fee of more than 50 percent of your credit limit, and may even want to add in monthly fees, too. Some fees, like those for late payments or going over your credit limit, are normal for any credit card. However, you may want to step away from the offer if these fees seem higher than what is offered by other lenders.

Types of financing to avoid

There are some types of financing that are a very bad idea for anyone, especially those with past credit problems. Even so, these financing options are usually marketed to those who have a poor credit rating. These are lenders that may be looking to reel you in and rack up the fees. Types of financing to avoid include car title loans, payday loans, cash advance loans and mortgage financing with no money down. The first three require borrowers to pay back the money within a short period of time or face interest rates of up to 50 percent. The last one leaves you with incredibly high mortgage payments that can be hard to keep up with.

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