Bad credit can be a serious roadblock when you are trying to finance a house or a car.
In fact, it can prevent you from obtaining a mortgage or a car loan at all.
There are financial institutions that specialize in loans to people with poor credit, but the interest rates are high resulting in long-term costs that are utterly ridiculous.
When your credit score is low, it will cost you huge amounts of money in higher interest rates even if you are able to secure a loan.
Here are a few examples: Many of the car companies now offer 0% financing for 60 months on new vehicle purchases.
What you don't realize when you see the commercials is that to qualify you must have a credit score of 740 or higher.
If you are financing $20,000 on an automobile purchase for 60 months at 0% interest, your payment will be $333.
33 per month.
By comparison, if your credit score is below 760, and you have to take a standard car loan at 7%, your monthly payment will be $495.
03.
Over the five-year period of the loan, the total cost of the higher interest is $9,702.
00.
When it comes to home mortgages, the bad credit effect of higher interest is even more profound.
Let's say you are seeking a mortgage in the amount of $300,000 for a new home purchase.
For the sake of this example, we are using a standard 30 year fixed rate model.
Right now if you have good credit (740 or higher), you can get a 30 year fixed rate mortgage for 4.
6%.
At this rate, your mortgage payment will be $1537.
93 per month excluding insurance and taxes.
By comparison, if your credit score is lower, the interest rate that you can get will probably be about 6.
0%.
At this rate, your mortgage payment will be $1798.
65 per month excluding insurance and taxes.
Over the 30 year term of the loan, the total cost of the higher interest rate is a jaw-dropping $93,859.
20.