Credit conditions nationwide are improving, and have been doing so since the end of the recent national recession. However, some consumers are still struggling to improve their credit standing, and failure to do so is likely costing them significantly.
Financial institutions nationwide are now significantly broadening their lending qualification standards to incorporate more borrowers who have subprime credit ratings, but those who seek this type of financing will likely pay dearly for doing so, according to a report from the financial advice site Smart Money. Generally, the lower a person's credit rating is, the higher the interest rates and fees they will face on a line of credit, as lenders are trying to mitigate their risk in extending financing to these borrowers.
There are three popular types of financing for consumers that will generally be available to even those with lower scores and are also likely to be quite costly, the report said. The first is auto financing, which is generally available to all but those with the lowest credit ratings. Recent data shows that those with top-notch ratings can expect to pay as little as 3.2 percent interest on their car loan, but the lower the score, the higher the rate. Those with scores below 680 will likely face interest rates ranging from 6.5 percent to 12.9 percent. The difference between the lowest available auto financing interest rates and the highest ones could be as much as an extra $2,760 over the life of a five-year, $10,000 loan. This issue could be problematic, given that as much as 44 percent of all auto financing last year was granted to subprime borrowers.
Along similar lines, many of the nation's top credit card lenders are once again extending new accounts to subprime borrowers, but doing so with accounts that bear sizable interest rates and fees, the report said. Though subprime borrowers can now obtain cards, they will likely pay interest rates in excess of 20 percent for carrying a balance, which can add up quickly when compared with the APRs closer to 13 percent paid by those with healthier credit ratings. But because these interest rates are only applied to balances carried from one month to the next, borrowers can avoid the high cost of these accounts by making sure to pay off whatever debt they rack up at the end of every month.
Finally, some have criticized lenders for keeping lending restrictions on mortgages too tight, but these are broadening somewhat as well, the report said. However, consumers who have scores of 620 or more will be able to qualify, but will pay interest rates of 4.9 percent over the life of a 30-year fixed-rate mortgage, and will likely only qualify after making a down payment of 20 percent.
Lenders of all types have seen repayment rates on the various lines of credit they offer improve considerably in the last year or so, but experts say they have to logically stop improving eventually.