The Double Cost Damage Caused by Bad Credits

Anybody should know the reason why he has a bad credit. Those who are planning to make car loan should brace themselves for higher monthly payment for subprime loans.

According to Experian, for a five–year new car loan made in April, an average of 4.54 percent was paid by a buyer with prime credit. But a subprime buyer did pay 9.55 percent which simply means an increase of $59 per month on a $25,000 loan.

Aside from an increase in monthly payment, the buyer should also prepare for a higher car insurance premium.

Even with a clean driving record, a subprime credit can incur you an additional cost ranging from $30 to $100 a month.

Liz Pulliam Weston, a finance columnist who wrote “The 10 Commandments of Money: Survive and Thrive in the New Economy” said that life becomes more expensive for people with bad credit even if they do not intend to borrow in the future. Let us look at some examples on how a poor credit history can create double damage to car buyers.

Life becomes more expensive if your credit is bad

Due to recession, American’s credit scores reduced in points. In 2011, Experian credit reporting agency said that the average credit scores of those buying new cars or trucks dropped by six points from 766 to 761. For used vehicles buyers, the average credit scores dropped by nine points from 679 to 670.

With the economy recovering, lenders are now more willing to accept loan applications from those who did not qualify a year or two years ago. It was observed that there is an increase of 13.8 percent for new car loans to customers with poor credit, according to Experian. And for used vehicles loans, there is an increase of 8 percent.

The risk scores provided FICO which is the largest provider are also the risk scores used by Insurance companies. Insurance companies use these data as a good predictor of claims. Bad credit adds to you insurance cost. There is no exact answer as to how much cost is added. But in California, Hawaii and Massachusetts, insurers are not allowed to use credit information to determine insurance rates.

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