Why You Shouldn't Take Out Loans With Bad Credit

I don't know a single person who doesn't wish that they could get ahead financially. Some of us don't care about being rich, but we all care about being secure. It would be nice for most of us to have a little more in the bank.

Unfortunately, we're constantly making mistakes that get in our way. Financial mis-steps are to be expected but we need to avoid them when we can. Throwing away money is never going to get us to where we need to be.

One of the biggest financial mistakes you can make is taking out loans when you have bad credit. The cost of the loans is seriously insane. Let's illustrate with a simple example, from my life.

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I have 800 credit and a few months ago I took out a mortgage to buy a new home - my first home! I had to borrow $188,900 and qualified for an interest rate of 3.9%. The total interest I will pay on that loan over 30 years is $122,959.20, assuming that I don't pay it off early. I of course have excellent credit but obviously that is still a lot that I have to pay in interest. I paid very little in fees - around $2,000. If we add up the down payment ($20,000), the principal, the interest, and the fees, we find that I will pay a total of $333,859.20 for my home.

Let's say that my credit score was around 600. It would be a lot more difficult to find a lender but honestly, I probably could. It seems that right now some lenders are going all the way down to a score of 580. That said, there's a big difference between the amount I would have to pay on the loan.

If my score was in this range, I would see a price adjustment on the loan of at least 1.5%. This would take my interest rate up to 4.4% and that would take my total interest up to $142,271.16. On top of that, the lender would probably charge me a point as an origination fee since I carry a higher risk than someone with a better credit score. This would cost 1% of the $188,900. That's almost $2,000 in up front fees on top of the regular fees.

As you can see, these fees really add up and at the end of the day, I'm looking at paying out close to $25,000 extra. If it costs you 2% extra in interest, you can probably figure out how much more that will cost.

The bottom line is that taking out loans when you have bad credit always has a cost. I would recommend fixing your credit before you cost yourself a lot of money.

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