Bad Credit Lending Interest Rates

Borrowers with a bad credit history will be faced with many difficulties when applying for a home loan.

In the first place interest rates will be substantially higher than a normal bank loan and there will be a raft of conditions to fulfil which can take some time to process. Before making an application to a non-conforming lender as they are termed, it is a good idea to consult an expert to prepare you for the process and to ensure that you have every piece of documentation you need to submit a successful application.

Mortgage brokers are best equipped to handle this for you because they are not only aware of the best deals in the market, but also of the lenders who are more likely to approve your loan. Every non-conforming lender has their own particular suite of products and they sometimes seek special niches in the lending market. If you lodge your application with the correct lender you're more likely to have a successful result.

How are bad credit lenders different?

Bad credit lenders have a different approach when it comes to assessing applications for home loans. Here are some things that motivate a bad credit lender.

They are interested in the reasons why a bad credit history has eventuated. In other words they want to know what happened when you got into difficulties with your previous lenders. If you had difficulty making loan repayments on time and a default listing is noted in your credit record, the nonconforming lender will want to know the reasons for this.

They want to know how things have changed. Not only will the non-conforming lenders be interested in your bad credit history story, they will also want to know what your prospects are for the future and why they should take a risk on you now. If there was a history of illness or accident that prevented you from working this could be sufficient to convince them that you are now ready to commit to repaying a loan, especially if you have steady employment and have shown a capacity to save money.

They want to make a profit from you. The bottom line for any lender is to make money and a nonconforming lender is no different. Whereas other normal retail banks will not take a risk on anyone with a poor credit history, a nonconforming lender can be convinced to take a risk if you tell a good enough story and can back it up with sound evidence. A nonconforming lender realises that you will not stay with them forever, and at best are only likely to stay as long as it takes to rehabilitate your credit file to the satisfaction of a normal bank. For this reason they are keen to charge as much as they can to keep their bottom-line in the black as much as possible.

This is not to say that non-conforming lenders are greedy and only want to extract cash from your wallet. The fact is they still have to live within the guidelines laid down by the Federal government and must conform to the principles of responsible lending. This means that they have to ensure that an applicant can afford the loan that they are applying for and that they will not experience any undue financial hardship as a result of taking up the loan offer.

Despite the fact that interest rates charged by non-conforming lenders are substantially higher than normal retail banks it is still possible to qualify for a loan and satisfy the Federal government's legislation.

This is especially the case where a person with a bad credit history applies for a loan to consolidate several existing debts. Let's look at an example.

Say a borrower with a bad credit history has an existing home loan of $400,000 which requires a monthly repayment of $2698.96. Let's also assume there is a personal loan of $15,000 requiring a monthly repayment of $345 and credit cards totalling $20,000 which require $600 per month by way of repayments.

This means they have total monthly commitments of $3643.96.

If the house is worth $700,000 and they wish to take out a consolidating loan to pay out all loans, a total of $435,000 with a nonconforming lender over 30 years at an interest rate of 9.2%, the required monthly repayment would be $3535.78. In this scenario the borrower would clearly benefit from taking out a loan, albeit at a higher rate of interest, because the total monthly repayments are just over $108 less per month.

This example shows that high rates of interest can still be attractive to a borrower and at the same time fall within government guidelines of responsible lending. If the same borrower was suffering credit difficulties and lodged the same application with a normal bank, it would probably be declined.

This is where bad credit lenders really come into their own.

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