To start with the cost of lending money and where banks and finance companies get there funds from. All finance companies and traditional banks get their money from somewhere to lend it back out in the market to you the customer, and of course just like any other business all lending institutions are there to make a profit, they buy the money for X and sell it for Y it’s as simple as that.
The difference between the traditional lenders and the bad credit lenders is this, with the traditional banks and lenders they buy their funds at a much cheaper rate, why? Because they deal with low risk customers and for this reason they can buy their funds at a much cheaper rate than bad credit lenders, and in turn they can retail the money and a cheaper rate as well, banks and traditional lenders only deal with low risk customers. These are customers that that have had a very good track record with credit and also have a very good credit score of 600 points or higher, however what determines what rate you get with a bank can also vary, such as the higher your credit score and the lower risk you are, the better the interest rate will be and vice versa.
With bad credit lenders, they get there funds from various places, such as private investors and some from larger banks as well as their own money that the owners have invested into the finance company. Now bad credit lenders get their money at a much higher cost than the traditional banks and of course that means that when they lend it back out to the public it is also at a much higher interest rate due to the high risk customers they lend to with past credit problems or very low credit scores under 600 points.
Now just like the traditional banks, most bad credit lenders will have a variance in the interest rate they charge to their customers, and what determines this is how bad of a credit history you have had and how bad of a credit score you may have, some bad credit lenders work on a risk category and they may have up to 5 risk categories, so it depends where amongst the risk category you fall in is based on your overall profile and past bad credit as to what interest rate you will be faced with.
Can you pay out the loan early?
With almost all bad credit lenders, yes you can however it is always best to ask your finance consultant if this is the case with the lender that has been selected for you, most bad credit lenders will not have any penalties for extra payments and also most importantly no penalties for paying out the loan early, once again ask this question to your finance consultant when applying.
Some bad credit lenders will have some form of early payout penalty, however this is normally not much at all considering the amount of interest you may save depending on how far in the loan you are when you are paying it out, e.g. 5 year loan term and paying it out in 3 years etc.
Are interest rates fixed?
Yes the interest rates are fixed for the term of the loan, however the interest is pre calculated on a reducing scale over the term of the loan, which means that the quicker you pay it off the more interest you save, so it is really up to you on how much interest you pay back to the lender. But also keep in mind that the only time the interest rate can increase on a fixed interest rate is if you default on the loan. If you default on your loan then the interest rate can increase from 2% to 5% higher depending on the lender as this will vary from bad credit lender to bad credit lender, they are not all the same so check with your consultant with this however it is always stated on your loan contract.
Will taking out a loan with a bad credit lender help me restore my credit?
Yes it can, but it’s not the only factor in place to getting back on track to restoring your credit, taking out a loan of a decent size such as $10,000 or higher for a car, boat, bike, etc. and keeping the loan for at least 18 months with a perfect repayment history is certainly a very big start, this will show that you are financially sound again and you can repay a debt without any problems. The other main factor in restoring your credit is showing good character by having paid off any and all bad debts that are on your credit report as well, otherwise you will have to at least wait until the bad credit on your credit report drops off, which is in most cases 5 years after the day they have been lodged on your credit report and with some others it can be up to 7 years.e.