The Finance Blogger

Our last post was from a reader who is looking for  a home loan and has a bad credit rating. They are looking for only $10,000 to repay their credit cards. They want to get away from the high interest rates that go along with credit cards. Credit card interest can be in access of 20%. In some cases approaching 30%. While a mortgage or personal loan can be in the range of 4 to 8 % depending on the amount being borrowed. Also security provided and the credit rating of the applicant. Consumers with the best credit ratings can find loans at rates even lower than these.

Bad Credit Home Mortgage Loan

Missing Payments Affects Credit Rating

The writer points out that they missed a few payments and this is what sparked the plunge of his credit rating. That’s right it does not take much these days for a credit report to be made to the credit rating agencies and suddenly your credit rating is in the tank and now you have to qualify for what is known as a bad credit home mortgage loan. These types of loans typically are hard to find since many lenders just will not lend money to someone with a bad credit rating and if they do they will charge a higher interest rate to cover their perceived increased risk.

They also may charge additional processing fees just in case the loan applicant defaults on the loan at some future point. This sounds onerous, however this is the way that many companies operate to protect and control their losses.

Our reader indicates that he has a decent job, a small mortgage on his home and no other loans other than the credit card balance. This type of loan would normally be a good candidate for a home mortgage loan, however due to his bad credit rating, he is going to find it difficult to find a lender.

Repay Credit Card Balances

The best approach for this writer would be to use any savings that he has to repay the credit card balance, unless there would be a severe penalty to cashing in some of his savings. Another approach is to offer his home as security and refinance his current mortgage to increase it to cover the loan he is looking for. Either way there will be a cost and it is important for him to compare the relative costs of various scenarios to reduce the credit card debt.

Many people will just go on paying this high interest, however the savings can be significant. We calculated the difference in interest costs between an 8% loan over 5 years vs. the same payments on your credit card at a nominal 20%. Some credit cards carry interest rates even higher than this rate. The reader did not tell us the current interest rate of his credit cards. Store credit cards can be as high as 29%!

Take out a home Loan

A home loan of $10,000 repaid over 5 years in equal monthly installments will cost $2032 in interest and the monthly payments will be $197. The credit card payments on the other hand calculated at 20% will carry a $5082 total interest cost and the monthly payments increase to $247 per month. That’s a $3000 difference which I would much rather have in my pocket than give it to the credit card companies.

Adding this same $10000 to a mortgage and spreading the payments over 30 years will cost more due to the longer term , however the monthly payments will be less as well. Either way continuing with credit card debt is not an option and should be dealt with as quickly as possible to avoid high interest charges even if you have a bad credit rating.

Feel free to comment on this post at any time and also post your own questions regarding debt and various types of loans that you might be considering. We will try to answer them the best we can with the information you provide us.

For more help with dealing with bad credit, click here.

Save

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.