Having a low credit score does not mean that you are bad at managing finances. It is not always the reason for a dropped credit rating. Instead, there could be other reasons, such as no credit history, joint accounts, unclear employment history, and no stable residential address. Whatever the reason, a bad credit score affects your chances of getting fair rates on loans and other credit options.

If you don’t find any favourable quotes from mainstream loan providers, check a bad credit loan. It is especially for individuals with mismanaged finances, CCJs, and loan defaults. The interest rates and APR stay competitive on such loans. It thus makes the loan a little costly.

You might think interest and APR are the same. However, they are two different terms that the blog discusses in detail. Understanding APR and interest rates would help you choose the right financial facility for any small or major life need.

Why is it important to understand APR and interest rates?

Understanding the two broader terms, APR and interest rates, is important. It reveals the true cost of borrowing. While the interest rate only reveals the costs of taking a loan, the APR includes the total amount you must pay over a year, including interest and other loan costs. However, it does not include loan penalties or missed payment amounts.

Knowing APR and interest rates would help you get a true picture of the total amount to pay. It thus helps you make informed financial decisions by comparing your options.

What is an APR?

Annual Percentage Rate represents the cost of borrowing money as a percentage. It includes interest rates, loan charges, and other costs that a borrower must pay over a year. It does not include compound interest. By providing a single percentage rate, APR helps the borrower compare their options easily. You may find a personal and representative APR while exploring the loan options.

For example, if you need urgent loans for bad credit from a direct lender to repair the leaking backsplash, you can compare and witness a 51% APR as a representative one online. It means only the first 51% who meet the eligibility criteria will get the loan at this APR. It differs from the personal APR that you get after detailed credit assessments.

It could be either the same, higher, or lower than the representative APR. The lender usually decides the rate to offer based on your affordability, credit score, and finances. Like, here if exploring one with bad credit, the APR stays competitive or costly on the loan.

What is the best APR on a bad credit loan?

The average Annual Percentage Rate (APR) for a bad credit loan falls between 29%-99.9%. You may not spot a low APR on a bad credit loan. Instead, it is higher than usual personal loans due to the risk of the borrower with mismanaged finances defaulting on the loan. Thus, to safeguard the borrower’s and the creditor’s financial interests and ensure responsible lending, the loan providers charge competitive APRs on loans with bad credit ratings.

How does APR work on a bad credit loan?

Bad credit loans have a high APR in comparison to other loans with a good credit history. It means that the cost of borrowing, which includes interest, principal, and other costs, is higher than that of a good-credit-rating loan. The higher the APR, the more you pay on the loan. It may include paying a high instalment amount monthly. It, at times, affects the financial well-being of a person. Lenders charge high interest rates to offset the risk of loan default. Therefore, one must borrow only if one can repay the dues in a timely manner.

For example, someone with a good credit score may get 7% APR on a loan. In comparison to this, the one with a poor credit history gets 29% APR on loans. There is indeed a vast difference that eventually affects the pockets.

You may compare the APR to determine the lowest loan costs possible. However, the actual APR you get depends on your ability to repay the dues without affecting other expenses. It is, in simple terms, also known as creditworthiness. Improving your finances and credit score slightly by paying off heavy interest debts may slightly reduce the impact.

What do you mean by interest rate?

The interest rate is the charge for borrowing money apart from the principal and other costs you pay. It is also expressed in percentage, just like an APR. It tells one the amount one must pay to leverage the loan services. Unlike APR, it does not involve complete loan costs but just the charge for borrowing.

High interest rates reveal that one must pay a good lump sum on the loan agreement. Alternatively, low interest rates mean you pay less interest on a loan. It could be variable and fixed depending on the loan provider’s criteria. The variable may rise or fall according to the economic fluctuations and the Bank of England base rates.

How do interest rates work on a bad credit loan?

Interest rates, just like APR, are higher on a loan with a bad credit history. It is generally expressed as a percentage of the loan amount that you pay every month. High interest rates make one pay more interest throughout the loan duration.

Whereas a low interest rate means low monthly payments and overall amount payable, a high one means paying more on monthly payments and overall loan costs. APR does not change throughout the loan term. However, variable interest rates may shift accordingly to changes in the economic hemisphere.

What interest rate can you get on a bad credit car finance?

The interest rates stay slightly high for financing a car with a bad credit score. You may find quotes with interest rates like 9.9% or higher. It may increase the monthly instalments to pay on the loan.  

You can fetch better rates on bad credit car finance from a direct lender by minimising the number of hard checks. Instead, use a loan calculator or prequalify to determine the affordability and loan approval chances. It might tell you the exact cost, but it is the approximate one. Here is how it may work:

1) Improve your credit standing before applying

Check your credit report for the delinquencies and report them. Pay some debts to reduce the liabilities and increase your loan affordability. Update the information on the report, like name, ID, and electoral roll. Check and identify the possibilities of debt consolidation if you have too many debts to cater to.

2) Provide a large sum as a deposit

A deposit decreases the overall amount to repay, the monthly instalments, and the interest rates. It also reduces the risk of default associated with the borrower with a bad credit rating. Hence, you may get the car finance for bad credit instantly. Work for at least a year before purchasing the car. You must budget separately for the deposit before applying. The higher the deposit, the less you pay overall.  It is if you don’t miss the payments.

3) Get a guarantor or apply jointly

A guarantor with good credit history and income may help you fetch low interest rates despite a bad credit history. However, the person should be someone whom you can trust fairly.  He must pay if you cannot repay the amount alone. Alternatively, co-sign the loan if you want to split the loan liabilities and reduce the burden.

Bottom line

Getting a bad credit loan implies paying high interest and APR over the year.  It eventually affects the financial stability and well-being, especially if you have other payments to cater to. Thus, you must pay some debts, update your credit report, and inform of delinquency before applying. Also, borrowing a smaller amount may help you save money on interest.