The Cost of a Bad Credit Loan
While bad credit loans offer people with low credit ratings a way to get the money they need, they can also be expensive. Usually, if you don’t have very good credit, you don’t have a lot of extra money to toss around. That’s equally true of most people who are applying for a loan. So, finding out the cost of the loan ahead of time is a good idea. Let’s look at some common expenses for bad credit loans so that you can more easily determine the cost of yours.
The Base Rate
The principal or base amount of the loan is the same as what you borrowed. If you borrowed £500, then you have to pay back the base amount of £500. You’ll have to pay back more on top of it, of course, but you have to start with the principal.
How much that ends up being is actually directly tied to your income and the money left over after you pay your bills every month. The lending company is going to ask you how much you make each month, and they will likely want a copy of your pay stub to prove it. They will use your income as a base for determining the size of your loan, so keep that in mind as you make your loan request. If you ask for a ridiculously-sized loan, then you are likely to be turned down.
The Interest Rate
Here’s the other major cost associated with loans. Whenever you borrow money, you have to pay interest on that loan amount. The interest rate is a percentage of the base amount. That interest rate usually stays at a fixed number until you pay off your loan, so long as you pay according to the timeframe you agreed upon initially. If you pay late, miss a payment or still have more to pay on your loan by the time the loan’s term is expired, then you will likely have to suffer an increased interest rate. This is to motivate you to pay off your loan faster and to ensure that the lending company is being reimbursed for their inconvenience.
Fees
There are almost always fees associated with bad credit loans. Whether you have to pay them or not depends on how you repay the loan. If you repay on time, then you may not have any fees. If you pay too early, then you may have an early repayment fee. That could seem absurd to you, but the lending company justifies it by having it make up for revenue they have lost due to you not paying interest for a longer period of time.
You can also accrue fees for paying late or failing to pay off all your loan on time. These tend to be the highest fees, and you definitely want to pay attention to them as you get closer to the end of your payment contract.
You may also have to pay various assorted fees for different services. Some lenders will charge you for processing your application. Others will issue a convenience fee for depositing your loan into your bank account.
These are just a sampling of the possible fees. Make sure you get a full list of potential fees before you agree to any bad credit loan.