Calculate Monthly Personal Loan Payments
Borrowing Tips for People With No Credit History
People with no credit score or bad credit scores are typically charged significantly higher interest rates than people with higher credit scores. As such, loans for higher amounts or longer periods of time cost those with bad credit or no credit significantly more interest over the life of the loan.
How Much Does a Poor Credit Score Cost?
Since personal loans are typically unsecured, they are typically more expensive than loans secured by collateral.
According to Informa Research Services in January of 2013, the national average for a 36-month $20,000 auto loan would have the following costs.
| FICO® score | APR | Monthly payment |
|---|---|---|
| 720-850 | 3.433% | $585 |
| 690-719 | 4.874% | $598 |
| 660-689 | 6.927% | $617 |
| 620-659 | 10.403% | $649 |
| 590-619 | 15.746% | $701 |
| 500-589 | 16.969% | $713 |
Based on the above chart, a person with great credit might be expected to pay $1,060 in interest over the life of the loan. Whereas a person with a low credit score might pay closer to $5,668 for the same loan, an amount that is 435% higher.
Secured vs Unsecured Lending
Loans which are backed (or secured) by valuable resources like a home or car are typically offered at far lower rates than unsecured loans which do not have collateral. The following table lists example rates.
| Loan Type | Secured by | Term | Average APR |
|---|---|---|---|
| Mortgage | Home | 30 Year fixed rate | 3.80% |
| Auto | Vehicle | 5 Year fixed rate | 3.32% |
| Personal | Unsecured | 5 year fixed rate | 10% to 32%* |
| Credit Card | Unsecured | floating rate revolving debt | 12.89% to 23.46%* |
* depending on the credit score of the borrower. Borrowers with lower credit scores typically pay a higher rate of interest.
Typically longer duration loans charge a higher rate of interest because lenders absorb more risk when offering them. If rates fall significantly homeowners can refinance into lower rate mortgages. And if rates go up significatnly homeowners may keep their loans with the existing rates which pay the lender below market returns for decades to come. And yet, in spite of these risks, the rate charged on a home loan are far below those charged for personal loans or credit cards because the debit is backed or secured by an asset.
Alternative Credit Sources
In addition to credit cards & traditional bank loans, there are numerous sites like Prosper and Lending Club are peer to peer lending marketplaces for personal loans. These sites typically tend to offer lower rates than are typical from payday lenders & pawn shops.
Some businesses also build virality into their funding by using platforms like KickStarter, Indiegogo & RocketHub. Some vertical funding networks include sites like Smallknot (local businessses), Spot.us (journalism), Gambitious (video games), MedStartr (health care) & GigFunder (music).
Selling used items on eBay & Craigslist is also a quick way to raise some funds. There are many vertical online marketplaces for selling freelance services from logo design (99designs) to repetitive tasks (Amazon Mechanical Turk) to quick clever ideas (Fiverr).
Improving Your Creditworthiness
Here are a some ways to save money when buying a car with a bad credit profile:
- consider buying a used car that you can afford to pay cash for
- buy a smaller & more affordable car
- this can save money on loan interest costs as well as insurance AND gas
- students who do well in school may also qualify for discounts on insurance rates
- save up to make a larger down payment on your purchase
- get a co-signer for your loan
- borrow from family for part or all of the loan
- get a loan with no pre-payment penalty & make extra payments
- build credit with a credit card & regularly pay it off (carrying no balance from month to month) such that you establish a credit history or rebuild your credit before making larger purchases
- download your free credit reports from AnnualCreditReport.com at least a couple months before you want to buy a car, such that you have time to clean up any issues before seeking auto financing.
- Challenge any information that is not recognized or verifiable. The company that has placed the entry on the credit report has 30 days to respond to a challenge with proof that the creditor owes them what the entry claims. If the company does not respond within 30 days, the entry is removed from the credit report.
- You can also purchase your credit score from MyFICO for $19.99 or sign up for free at CreditKarma, in order to best estimate what sort of interest rate you might be charged for your loan.
