How does bankruptcy affect the interest rate on a loan?

If you have ever filed for bankruptcy, you know that it can completely damage an individual’s credit scores and interest rates. People declare bankruptcy for different reasons. Some may have medical bills, others may have lost their jobs, be going through divorce, or defaulted on personal loans. Unemployed people frequently have to declare bankruptcy because of the scarcity of jobs in today’s economy.

Individuals who file for bankruptcy are able to begin with a fresh start—little or no debt! Bankruptcy stays on an individual’s credit report for seven to 10 years after they file. This is a huge burden to have.

Bankrupt borrowers are risky. Credit scores show a lender how likely a borrower is to make a payment on a loan. If this number is damaged, not only is it hard to get a loan or credit, but if you are approved for a loan or a credit card, you will have outrageous interest rates. Your interest rates could be over 25 percent on your credit cards or over the life of your loan!

Those who have filed for bankruptcy will have higher mortgage rates. They will not be able to be involved with special incentives like “0% APR” on auto and financing loans.

Additionally, most banks will not let a borrower get a loan if they have filed for bankruptcy without making the borrower pay a down payment first. Higher interest rates will also ensure that the lender’s loss will not be as large if the borrower cannot pay back the loan.

There are several ways a borrower can reduce the risk of bankruptcy. Create a budget and stick to it. Make sure you pay your bills on time. This will help you avoid credit card debt. One way to make sure you pay your bills on time is by getting an installment loan, like a car loan. Refinance your loans, and make sure you review your credit report. Try to avoid borrowing anymore money for a while, and keep in mind that if you do decide to take out a loan, a $10000 loan with bad credit is probably not realistic. Set your sights on a smaller amount if possible. If you have questions, talk with your financial advisor.