Bad Credit Loan Calculator: most Americans know that a good credit score is essential to the health of their personal finances.
But many may not realize that a bad score can cost them thousands of dollars when it comes to buying a house or car, or opening a credit card account.
By Alex Nixon | Wednesday, July 20, 2016, 9:00 p.m.
Bad Credit Loan Calculator: on a five-year $20,000 auto loan, for instance, someone with a poor credit score — around 600 — could pay $5,000 more in interest over the life of a loan than a person with a stellar score above 700, according to the Consumer Federation of America, a nonprofit consumer advocacy organization in Washington, D.C.
In a recent survey, the Consumer Federation and VantageScore Solutions found that over 80 percent of Americans knew that 700 was a good score and that mortgage lenders and credit card companies pay attention to scores. But only 22 percent knew how much a bad credit score could cost them on typical loans.
“Of greatest concern to us is that most consumers don't understand how badly they'd be penalized when applying for a loan with a low credit score,” said Stephen Brobeck, the federation's executive director.
Bad Credit Loan Calculator: “if your score is 700 or above, you're not going to be penalized much, if at all,” he said. “If you're below 600, you definitely will be penalized.”
The Consumer Federation and VantageScore, a credit scoring company based in Stamford, Conn., surveyed 1,005 adult Americans in April.
The survey had a margin of error of plus or minus 3 percentage points.
And poor credit scores hurt consumers in other ways, said Liz Weston, a personal finance columnist for NerdWallet, a financial website based in San Francisco. Bad credit can make it more expensive to rent an apartment and harder to receive a good rate on car insurance, as well as lead to higher deposits for utilities.
Weston said bad credit can cost the average consumer an additional $200,000 over his or her lifetime. “It really does permeate your financial life,” she said.
Bad Credit Loan Calculator: people with poor credit scores can pay about 1 percent more in interest for a mortgage than someone with good credit, Weston said. While that may not seem like a big difference, when spread out over a 30-year loan, the extra 1 percent can add up to tens of thousands of dollars.
The difference in rates can be even larger when it comes to home equity and auto loans, she said. In some cases, someone with bad credit will pay twice the interest rate as someone with a good score. “Home equity and auto loans are incredibly sensitive to credit scores.”
Given the much higher rates, the Consumer Federation's Brobeck said he recommends that people with low credit scores ask themselves: “Do I really need this loan?”
People should consider buying a less expensive car that they can pay for in cash or with a smaller loan, for example. Or if possible, find a relative to co-sign for a loan.
“Then work really hard to increase your score,” Brobeck said. “Make those payments in full, on time every month.”
Bad Credit Loan Calculator: one of the most common ways in which consumers hurt their credit is by skipping credit card payments, which can reduce their score by 100 points — the difference between a good score and a bad one.
“If you skip a payment, you are really torpedoing your score,” Weston said.
She recommends reducing credit card balances to less than 30 percent of their limits, which can go a long way toward raising a score. Maxed-out credit cards are a signal to lenders that consumers may be financially stressed and a greater credit risk.
“People underestimate how much their credit card balances are hurting them,” Weston said. “If you consistently max out cards looking for rewards, that hurts you, even if you pay them off every month.”
Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or email@example.com.
Bad Credit Loan Calculator: while higher education has become a lightning rod for discussion about the return on investment for training, one thing nearly everyone agrees on is that the cost of education is problematic. In particular, student loans have emerged as one of the great financial burdens of our times.
Consider these statistics:
• Outstanding student loan debt in America is now at $1.3 trillion – a 300% increase from eight years ago (www.fastweb.com/financial-aid/articles/shocking-student-debt-statistics)
• $35,000 was the average college debt owed by the class of 2015 (http://blogs.wsj.com/economics/2015/05/08/congratulations-class-of-2015-you’re-the-most-indebted-ever-for-now/)
• As many as one in three Americans with active student loans are at least one month behind on payments (http://blogs.wsj.com/economics/2015/04/14/the-student-loan-problem-is-even-worse-than-official-figures-indicate/)
Ironically, if you currently hold student loans, these kinds of statistics don’t even matter. What matters to you is what’s going on in your own household. In that case, you’d need to know these facts:
• Defaulted student loans can prevent you from receiving certain types of federal assistance, including FHA mortgages.
• Co-signers — usually a parent or grandparent — are as liable for the debt as the student is, and will suffer the same consequences if the loans aren’t paid in a timely way.
• Loans taken out on behalf of the student — usually by parents or grandparents — must be paid back even if the student doesn’t complete a degree or, worse, even in the case of the student’s death.
• Defaulted student loan balances can be deducted from the borrower’s Social Security benefits or taken from tax refunds.
• Student loans, whether Federal or private, are almost never discharged in bankruptcy.
Bad Credit Loan Calculator: if you’re not convinced already, let me say it plainly: Despite what you might hear about “good” debt and “bad” debt, student loans are actually pretty toxic. Even the outrageously bad mortgages of the last decade allowed the borrower the possibility of some relief through foreclosure, short sale or bankruptcy. In the case of student loans, all of the protections are tilted in favor of the lender, with almost no mechanism for offering the borrower a fresh start, under any circumstances.
Well, OK then. When faced with an intractable situation, I vote for ending the relationship. In the case of student loans, that means retiring the debt so you can move forward with the rest of your goals. I can recommend at least 10 different ways to do that, including the following.
1. Just pay according to the plan. If your debt is relatively low — say $10,000 — set up an auto-withdrawal from your bank account and move onto solving other problems.
2. Resist the urge to defer. Deferring one’s loans, especially while pursuing another level of education, can seem logical. Unfortunately, not all deferrals are created equal, and in some cases the interest continues to build. I know a woman whose $40,000 in loan debt had almost doubled by the time she started making her payments.
My advice is to resist mightily, but if you must defer, at least make random payments marked for principal as often as possible.
3. Achieve loan forgiveness through the Public Service Loan Forgiveness Plan. This program gives credit for work with qualifying government agencies or nonprofits, going back to October 2007.
When you’ve accumulated 10 full years (120 months) of working in these organizations while making on-time payments of your loans, the balance of your debt will be forgiven.
There are conditions to meet, so go to https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service to decide if this is option is right for you. Note that if your debt is somewhat low, your “return on investment” might not balance with working for a (potentially) lower wage for 10 years.
4. Increase your payments to principal. Doh. This is so simple it’s easy to overlook. Check out these numbers and use the calculator at Finaid.org: A loan of $30,000 at 6.8 percent interest and a monthly payment of $345 over 10 years will accrue $11,429 in interest. That’s more than a third of the original balance!
If you were to add just $25 per month to your payment, you’d save $1,157 in interest and cut almost a year from the payment plan. An extra $50 saves $2,096 and 1.7 years of payments, while $100 more per month chops off almost 3 years and $3,531 in interest.
Bad Credit Loan Calculator: I’m out of space, so come back next week and I’ll provide six more options for retiring your student loan debt, including the possibility of negotiating repayment into a job offer. In the meantime, you’ll need to gather the following information if you’re serious about this project: How much do you owe and at what interest rate? What are your total monthly payments — and how much of that is principal? If you follow the current repayment schedules, when will your debts be paid — and how much will you have paid in total?
Bad Credit Loan Calculator: shopping for a car is never easy, particularly when you have bad credit. Your credit score dictates what type of interest you’ll end up paying on your car loan, and a low score means a higher interest rate. The good news is you aren’t necessarily destined to pay a high interest rate on your auto loan for five or more years just because your credit score isn’t great. This guide will help you figure out how your credit score affects your auto loan along with your options for getting an auto loan if you have bad credit.
Who this guide is for:
I’ve prepared this guide with the following groups of people in mind:
Young adults who have a short history of credit and a low credit score
Immigrants who have not established a long credit history and need a vehicle
Anyone with less than great credit
Anyone who is in the market for a new vehicle
Bad Credit Loan Calculator: Methodology
To find out what options are available for consumers with bad credit who need to buy a car, I talked to nationally-recognized credit expert John Ulzheimer, who has over 24 years of experience in the consumer credit industry, and Beverly Harzog, consumer credit expert and author of The Debt Escape Plan. In addition, I read 14 publications about credit scoring and securing auto loans. These sources provided me with insight into how credit scoring works, how it can negatively impact your ability to get a low interest rate and what you can do to keep yourself from getting even further into debt when you have to buy a car with bad credit.
Bad Credit Loan Calculator: What is a credit score?
Before we start talking about how to buy a car with bad credit, let’s talk about what a credit score is. Your credit score is a three digit number that is calculated based on your credit history. While there are several credit scoring calculators out there, the one that controls the market, and therefore the only one you really need to worry about, is your FICO credit score. The FICO credit score scale ranges from 300-850.
According to Ulzheimer, any score under 540 is at risk of being denied an auto loan of any kind, and a score of 740 or higher is likely to get the best interest rate, although your results may vary based on what is in your credit score and who you are working with as a lender.
Bad Credit Loan Calculator: What is counted in your credit score?
Your credit score is based on your credit history, which includes credit cards, student loans, auto loans and mortgages. In addition to the type(s) of credit you have, your FICO score also calculates your payment history including late payments, how long you have had accounts open, how often you use your accounts and how many new credit lines you have open.
Because every individual’s credit history is different, certain factors will hold more weight than others. For instance, if you do not have a long credit history and have several late payments, your credit score will be factored differently than someone with a long credit history and the same amount of late payments.
Even though every score is factored based on the individual’s personal credit history, FICO maintains a particular breakdown for calculating credit scores:
Bad Credit Loan Calculator: Payment history (35 percent)
Your payment history makes up the biggest percentage of your FICO score, which can be good or bad news depending on how often you pay your bills on time. If you are a frequent late-payer, now is a great time to start getting those payments in on time. The good news is that because payment history makes up such a large portion of your overall score, it can be relatively easy to bump up your credit score if you just start making payments on time. Payments that have gone into collections and judgements are counted here.
Bad Credit Loan Calculator: Amounts owed (30 percent)
There are a few things FICO considers in this category. First, what is the overall amount of money you owe on all of your accounts? Keep in mind that even if you pay off multiple credit cards every month, your FICO score may reflect a balance depending on what your lender has reported to the credit bureau. Generally the balance of your last statement is what is used when you pull up your credit score. Your FICO score will also consider what you owe on specific accounts such as credit cards and loans.
In addition to how much total money you owe, your score will calculate how close you are to reaching your credit limit. Individuals who are close to maxing out their credit limit are a higher risk for lenders than those who are not. Having a high percentage of accounts with balances also makes you a high risk for lenders.
Finally, your score considers how much you still owe of the installment on a loan. Paying down your installment is a good sign to lenders that you can manage your debt.
Bad Credit Loan Calculator: Length of credit history (15 percent)
Your FICO score takes a look at how long you have had open accounts, how often you use those accounts and the average age of all of your accounts. It is still possible to have good credit even if your accounts are new, based on the other factors in your FICO score.
Bad Credit Loan Calculator: Credit mix in use (10 percent)
Your FICO score will be higher if you can demonstrate an ability to manage different types of credit lines such as a car loan, mortgage and credit cards.
Bad Credit Loan Calculator: New credit (10 percent)
Opening several new lines of credit in a short amount of time is a red flag for lenders, especially if you have a short credit history.
While this is the general breakdown of your FICO credit score, keep in mind that your score will be weighted differently depending on your particular credit history. If you only have one credit account, for instance, your score will look different than if you have multiple credit cards and a mortgage.
How bad credit affects your car loan?
In general, a credit score that is 740 or higher will get you the best interest rate on an auto loan. If you have great credit, you might be able to score an auto loan as low as zero percent (yes, you read that right). If you have terrible credit (lower than 580), you might be looking at interest rates as high as 20 percent or even close to 30 percent. That can add up to paying thousands of dollars extra for an automobile with bad credit versus good credit.
Lenders want to feel confident that borrowers will pay their money back on time and in full, which is why consumers with good to great credit get the best interest rates. They pose a low enough risk based on their credit history that lenders feel assured they will pay their debt back responsibly.
Consumers with bad credit, on the other hand, pose a high risk. Things like missing payments, defaulting on loans and having a high debt-to-income ratio all raise red flags for lenders, who will charge a high interest rate when they do not feel confident they will get back the money they are lending.
In addition to reviewing your credit score, lenders will also take a look at other factors that are not included in your FICO report such as :
How to shop for an auto loan when you have a low credit score
Bad Credit Loan Calculator: Where you can get auto loans
Anyone shopping for a car should also shop around for a lender. It’s a misconception that you have to settle for the first financing offer you receive, and, in fact, you shouldn’t consult with only one lender any time you need to take out financing for a purchase. You can get an auto loan from several sources including:
7 steps to take to get an auto loan
Regardless of the reason for it, having a low credit score can make it difficult to buy a car. In general, car dealerships raise interest rates for buyers with low credit scores, also called subprime buyers, because subprime buyers pose a greater risk than buyers who have great credit. However, even when you have bad credit, it’s important to reach out to a reputable bank or lender to see what options are available for financing your auto loan instead of automatically accepting a high interest rate. Follow these steps to secure a fair loan:
1. Bad Credit Loan Calculator: Ask yourself how badly you need a car
Are you buying a car because you really don’t have any other mode of transportation? Or is your car more of a luxury item? Both Ulzheimer and Harzog recommend only buying a car with bad credit if you are in an emergency situation.
Before you start shopping for a car and an auto loan, take a closer look at your situation to see if you have another option such as using your current car, carpooling or using public transportation for 6 months to a year while you work on rebuilding your credit.
“If getting a car isn't an emergency, I suggest getting a secured card and spending at least six months (a year is better, though) responsibly using the card,” says Harzog.
A secured card is one way to build credit when you don’t have a credit history, and it can also be used to rebuild credit. You make a deposit in the bank when you open your secured card to secure the card, and you get that deposit back when you close your account.
“When you're using a secured card, you're actually using credit,” Harzog explains. “As long as the card issuer reports your payment history to the three major credit bureaus, you'll begin to rebuild your credit history and bring up your FICO score.”
However, “if you have bad credit because you misused credit cards, this is not a good idea. Don't use credit cards again until you feel comfortable you can control your spending.”
If you must get a car and have bad credit, then prepare yourself for a high-interest loan. If you have high credit because of your payment history (which makes up 35 percent of your credit score), then start paying your bills on time. Even a few months of paying bills on time can bump up your credit score. If you can push buying a car off for even a month or two, you might end up with a high enough credit score to make a difference when it comes to interest rates.
2. Bad Credit Loan Calculator: Check your credit report:
Don’t take a dealership’s claim that you have bad credit at face value. You are allowed to perform a free credit report check once every twelve months. See for yourself what your score is, what activity has affected your score and if there is any suspicious activity on your report. Bring your credit report with you when you meet with potential lenders so that you are on the same page when you discuss your financing. Harzog suggests talking to your lender about your credit history “if you have a good reason for a negative item” to see if that affects your interest rate. Some lenders may be willing to work with you depending on the reason for your low credit score.
3. Bad Credit Loan Calculator: Shop around
“Don’t think that just because you have bad credit you can’t get a car loan,” says Ulzheimer. In addition, “don’t just assume that your credit is bad.” Your definition of bad credit might not be the same as your lender’s definition, and different lenders will offer different rates. Do your research by finding out the rates various lenders charge so you don’t get taken advantage of.
Ulzheimer recommends looking up a lender’s auto lending rate sheet to learn what the current rates are for new and used vehicles based on your credit score and bringing this information with you when you meet with a lender.
4. Bad Credit Loan Calculator: Limit your search to a 2 week timeframe
It’s a cruel irony that applying for loans means lenders will check your credit score, and each check of your credit report negatively impacts your credit score. The good news is that scoring models usually count every credit inquiry performed by an auto loan lender within a 2 week time frame as just one inquiry. Because of this, it’s important to only apply for auto loans when you are actually ready to take one out. Otherwise you risk making your credit score problem worse.
5. Bad Credit Loan Calculator: Opt for a shorter loan period
You might have lower monthly payments with a five-year versus a three-year loan, but pay attention to the interest rate. Generally interest rates are lower for shorter term loans, meaning you will end up paying less for your car overall. Plus, you’ll end up with a few extra years in which you won’t need to make car payments so you can focus on paying off other loans to raise your credit score.
6. Bad Credit Loan Calculator: Look for newer versus older vehicles
Common sense might tell you an older vehicle will cost less, but the truth is older vehicles tend to charge higher interest rates than newer ones. Ulzheimer recommends anyone looking to finance a vehicle look at new cars first, and then newer used cars since these are the cars that tend to offer the best financing.
However, it’s possible to find a better deal on an older used vehicle, so check out all of your options before deciding. You may end up finding an older vehicle you can afford to buy with cash, which would eliminate your need to get financing in the first place.
7. Bad Credit Loan Calculator: Consider getting a cosigner
Depending on your situation, getting a cosigner for your car loan might be your best option to get a loan at a reasonable interest rate. Consider looking for a cosigner if any of the following apply to you:
Your income is lower than the minimum requirement for an auto loan
You have bad credit
Your debt-to-income ratio is too high to qualify for a loan
You have a variable income
Asking someone to cosign on an auto loan is a big deal, and Ulzheimer strongly discourages anyone from agreeing to be a cosigner. Your cosigner will be responsible for making your payments in the event you are unable to fulfill your loan obligations, so only take this approach if you are confident you will be able to make your payments in full and on time. Provided you are able to make your payments, having a cosigner on your loan can help boost your credit score.
What not to do when shopping for an auto loan
Bad Credit Loan Calculator: Shop at a “buy here pay here” lot
You might have heard commercials from local car dealerships targeting subprime buyers, but be wary. Those “buy here pay here” dealerships will generally charge more money for cars than they are worth. “Buying a car from one of these lots won’t necessarily hurt your credit score, but it won’t help it either,” says Ulzheimer. That’s because these lots don’t have to report to the credit reporting agencies, meaning your credit score will remain the same even if you make all of your loan payments on time and in full.
Bad Credit Loan Calculator: Let yourself get schmoozed by verbal promises
It’s easy to believe a salesman, particularly when they’re telling you things you want to hear about your car loan. Don’t believe your car salesman or F&I officer based solely on verbal promises. Make sure everything is in writing before you agree to terms.
Bad Credit Loan Calculator: Go car shopping without checking out your options
A lot of consumers are misinformed about what their credit score is and what options they have for financing based on it. Do some research before you go car shopping to see what rates you are eligible for. If you are clearly uninformed, you could wind up signing on to an interest rate that is way higher than what you are eligible for. In addition, avoid talking about yourself as high-risk: the more desperate you appear, the more likely you are to have interest points tacked on unnecessarily, which just translates to money in your salesman’s pocket.
Bad Credit Loan Calculator: Spring for extras
When you’re already tight on cash, you don’t need to pay for extras that aren’t necessarily worth the money in the first place. Things like extended warranties, GAP insurance and credit life policies are all optional (regardless of what your F&I officer tells you) and could end up costing up to thousands of additional dollars over the lifetime of your loan.
Bad Credit Loan Calculator: Sign anything without reading and understanding it thoroughly
I know you just want to get out of the dealership and on the road, but if you remember only one thing from this article, let it be to read everything carefully before you sign and walk away. Neglecting this could end up costing you thousands of dollars and/or making your credit even worse depending on what is included in your contract. Ask questions if you don’t understand, and don’t be afraid to walk away and tell the F&I office that you need some time to think it over before you sign. They’ll want your business when you’re ready to give it to them, no matter how much of a fuss they make at the thought of you leaving.
Things to look for include: penalties for prepayment, a loan with pre-calculated interest and who the primary buyer is when you are getting a cosigner.
Bad Credit Loan Calculator: Leave the dealership before you finalize your financing
This is a cruel trick played on eager consumers who just want a vehicle that can drive. Some dealerships will offer you financing “based on final approval,” and will let you drive off the lot before your financing is actually finalized. You, the unsuspecting consumer, are later told that your original financing wasn’t approved and are then slapped with a significantly higher finance rate. Don’t fall for this. Leave the lot in your old clunker, take the bus, walk home or catch a ride with a friend instead of driving off the lot in a car without approved financing.
What to do if you end up buying an auto loan with a high interest rate
“A lot of people don’t realize they can refinance their auto loans,” says Ulzheimer. “They think of refinancing for house loans and student loans, but they don’t know that they can get a better rate on their auto loan by refinancing when their credit score gets better.”
If you absolutely need a car and you end up with a punitive interest rate, keep in mind that you can refinance in 12 months, or whenever your credit score goes back up. Talk to your lender to find out what your options are. You don’t need to pay 30 percent interest for five years if your credit score improves and allows you to get better financing.
Bad Credit Loan Calculator: Pay more than the minimum payment, and pay on time
Another way to reduce the time period of your loan is to pay more than the minimum payment each month to reduce the amount of overall payments that you make. If you can’t pay more than the minimum, at least make sure that you make your payments on time since, even at a high interest rate, an auto loan will still help your FICO score.
An auto loan is “an installment loan and it contributes to the ‘mix of credit,’ which is a factor in your FICO score,” according to Harzog. However, “it's only 10 percent of your score so don't expect to get a big bump in your score.”
Whether you have no credit history or you have made some mistakes in the past, having a bad credit score can make it difficult to shop for a car loan.
However, many banks offer auto loans to people with bad credit.
Start by asking your local bank or credit union where you keep your checking and/or savings account to see if they can help you with an auto loan. Larger national banks can also help you secure an auto loan if you have bad credit.
In general, it is better to go with a bank or an auto financing lender rather than the car dealership down the street that is offering a “buy here, pay here” deal. If you do wind up with a high interest rate on your car, work on rebuilding your credit score so that you can eventually refinance. As Harzog says, “When you have good credit, you often have good options.”