In the standard mortgage market and credit card lending arena, the terms and interest rates you receive for a loan or account are based on your creditworthiness.
The loan amount for a mortgage or the spending limit on your credit card is based on your income and on the amount of debt you currently have.
What is Considered High Risk?
For a mortgage loan, the debt to income ratio is an important number for banks. Lenders know from data compiled on mortgages over the years that your total cost of paying for your home should not exceed 30% of your income.
This number may vary by a few percent depending on the lending institutions but includes your principal, interest, property tax, insurance and other costs associate directly with owning your home.
If you have a problem in your credit file or you are applying for a mortgage where the payment exceeds the standard percentage, you may find yourself dealing with lenders in the sub-prime mortgage market. You are a less than perfect credit risk and will qualify only for a less than perfect mortgage rate.
Five years ago, it was easy to obtain a highr risk loan or credit card even if you credit was horrible. Investment packages known as credit default swaps had become common in the financial industry.
These were high profit securities that were sold and resold by banks. Each sale of the bundled securities produced a high level of profit.
Not surprisingly, financial institutions lowered their qualification standards for loans to keep the new loans flowing. To a certain extent, this was a boon for consumers with bad credit.
Loans and credit cards for people with bad credit were not out of reach for people who made application. Sub-prime money was abundant and loans were easily approved. In the end, the result was a collapse of the housing market that was precipitated by the number of bad loans that had been approved.
Are You High Risk?
If you have made one or two late payments on an account you will not receive the best interest rate for any loan you apply for. However, unless you have obtained a copy of your credit report from each of the three major credit bureaus you do not know what might be contained in that file.
Your credit may not be as bad as you think or could be much worse than you expected. There may be errors in the reports that need correction as studies have shown a high number of mistakes contained in credit bureau reports.
Can You Qualify?
High risk loans and cards are not as easy to obtain as they were just four or five years ago. For a time it was almost impossible for someone with bad credit to get any home loan or standard credit account.
Credit cards for consumers with black marks in their files are now becoming available once again. The interest rates are high but if you can qualify for a card with bad credit you have the opportunity to rebuild your credit rating.
These are not accounts you would use to carry large balances from month to month as the interest rates results in high finance charges.
However, if you pay off all or most of your charges each month you could qualify within a year or two for a standard credit account with more favorable terms. Home loans are a different matter.
Mortgage money is tight and lenders are unwilling to grant sub-prime mortgages as they did in the past. The low interest rates that are in effect have led to great demand in the financial markets but the supply of funds has been restricted by banks.
Home Equity Line of Credit
When you ask about where to obtain credit cards and loans with bad credit the term “HELOC” (home equity line of credit) is often used.
This is a loan you might take on the equity that has built up as you pay down the first mortgage on your property. This is now classed with other high risk loans and cards as a dangerous way to obtain cash.
The HELOC has often been used to obtain funds to pay off high interest credit card debt. This is not a good plan and the falling home prices in recent years have greatly reduced the number of home equity loans available to consumers.
High Risk Personal Loans
It is possible to obtain a high risk loan directly from your bank. For small amounts, you may be able to obtain a loan without collateral but most banks will require you to pledge collateral for a personal loan. The collateral may be furniture, a car, or investments such as Certificates of Deposit.
Interest rates may be high and you may need to talk to several lending institutions before you find one willing to take a chance on someone with bad credit.
Do not apply for a loan until you have some idea whether the application may be approved. Too many applications made and declined can further damage your bad credit rating.
The credit cards are becoming more common as lenders realize consumers hurt by the poor economy are good credit risks for the future even though they have damaged credit now.
Home loans and home equity lines of credit are not plentiful for those with bad credit. It can be impossible today to find a mortgage lender who will issue a loan if you have truly bad credit.
By checking your credit reports you can correct any errors and may find your credit is not as bad as you thought. Even with bad credit, loans and credit cards are available to you! However, you may need to search diligently to find one that suits you.