Bad Credit: 3 Ways It Impacts Your Ability to Borrow Funds
Bad credit impacts individuals and business entities. It is usually a result of the failure to pay bills on time or at all. If you plan to borrow funds in the future, a sub-par credit score makes it difficult. Your score determines your risk to lenders. There is an upside, too. It forces you to think twice about taking on debt again. You also have an opportunity to make better purchase decisions.
The following are three ways a bad credit score impacts your ability to borrow funds in the future.
Higher Interest Rates
There are lenders that focus on working with applicants with low credit scores. They’re willing to take on the risk because they package debt in a manner that doesn’t hurt them greatly. At Mortgage House, we work with home loan applicants who have low credit scores. The trade-off is higher interest rates.
The loan gives you the opportunity to start developing a positive payment history again. Down the road, you may be able to look into refinance home loan options. After a refinance, the rates drop to a favourable level.
A low credit score represents a higher risk. Lenders who are willing to work with this applicant may request a higher deposit. A lender wants to ensure that you have skin in the game, too. Deposits are non-refundable, so you’re less likely to walk away from the debt.
To balance the risk of lending to an applicant with a low credit score, lenders may ask for collateral. If you own valuable jewellery, art, or other goods, you can put those in the lender’s possession against the debt. Your collateral is signed back to you if you successfully meet the lender’s terms.
Bad Credit Conclusion
Bad credit is not a financial sentence. It does make financing large purchases more challenging. A credit score can always be improved. If you commit and start off small, your credit score can see improvement over time.