Question

a) Briefly explain the two driving factors behind the interest rate on any loan?

b) How significant is good vs bad credit on the total cost of a car loan?

c) What types of loans are usually denied for people with bad credit?

d) Besides loans, what are some other negative consequences of having bad credit?

Answer 1

a) The two driving factors affecting the interest rate on any loan is :

• inflation
• supply of money

Inflation : High inflation, or anticipated inflation, will result in higher interest rates

Forces of demand and supply : The interest rate changes primarily by the forces of demand and supply. When the supply of money is large, the interest rates are low making people borrow more money.

b) How does out credit score affects car financing: The people with bad credit when they reach out for car loans have to pay a higher interest rates on car loans. Good credit is generally considered 690 to 719, while bad credit is below 630. Drivers with a poor credit always have to settle for cheaper cars due to the higher costs of financing. They also go or loans with a longer tenure in order to lower down the monthly EMI'S.

c)Personal loans are denied to people with a poor credit: in case of personal loans, there is no collateral or security securing the loan, unfortunately, if you have bad credit, your choice of loans may be limited and you may pay higher interest rates. So even if you do qualify for a loan, it may be expensive to repay it.

d)Due to a bad credit score, the borrowers have to pay higher interest rates and the loan tenure is also long in order to avoid paying higher monthly instalments . So, yes due to a bad credit not only does the loan application of the borrower gets rejected, but even if they do secure a loan to themselves then they are charged very high rates of interest .