There was a time when bad credit would be an obstacle for loan approval. However, since then things have changed dramatically and now bad credit is just a variable that mainly affects the interest rate you'll have to pay for your loan in almost any kind of loan product. Bad credit lenders are available offering all kind of loans provided you are willing to pay a higher rate for loan approval.

There is a wide spread myth that people with bad credit score and those who have filed bankruptcy will never get a credit card, car loan or home mortgage again in their life. Whatever the origin of this thinking, the fact is that even after having the worst kinds of credit, or even one day after filing bankruptcy, you can still get a credit card, a car loan or a home mortgage loan.

Effects of Bad Credit on Interest Rate

People having bad credit should remember that while they are eligible to receive any kind of loan, but they won't get it at the same interest rate at which a person with good credit would get. On the basis of the intensity of their problems, the experiences of the people with bad credit will vary from each other.

Some problems impact all bad credit debtors, but their severity is different and even the interest rates may be higher. Although this differentiation will astonish or offend a lot of people, if they maintain their cool, they can understand it. A rate of interest is calculated by taking into account the prevailing nationwide general rate of interest when the loan is granted and the specific risk associated with that particular loan.

Usually, in the US, the prevailing rate of interest is known as the prime rate, which refers to the rate of interest that a bank may charge its best clients. Because of competition, this prime rate is the same at most of the banks with very little variation. You can know about the current prime rate either online or from any financial publication. Other base rates are decided by LIBOR (London Interbank Offered Rate) or a particular treasury bill, which refers to a bond for certain term of years issued by the U.S. government. These rates generally determine mortgage rates, while the prime rate determines most credit cards and car loans rates.

Other elements of credit are seen as an addition to this rate, for instance prime plus 1% or LIBOR plus 10%. These add-ons are usually decided by the type of debt.

Some Examples

For instance, a home equity loan where the borrower's house is placed as security will be accompanied by little or no special extra risk as the lender considers the house as the collateral. He knows that the borrower will make all efforts to pay off the debt. On the other hand, an unsecured personal loan is accompanied by the risk factor. So, the creditor will increase the interest rate by adding 6% or more to the prime rate.

It is common knowledge that the people with past bill payment problems will get loans at comparatively higher Interest rates than those with perfect records because good credit scores will satisfy the lender that he will get his money back.