The business of banking is to extend loans to the needy customers, who are in need of money to meet certain types of expenditure, in the form of personal loans, to the customers to purchase vehicles, such as auto loan or car loan, or such other loans. These loans are extended to the customers either in the form of secured loans or in the form of unsecured loans, depending upon the nature of the loans offered to the customers.
The first and foremost of the eligibility norms for a person to obtain loan from a bank or financial institution is that he should have the necessary means to repay the loan amount during the period for which the loan is granted. The second condition and of course the most important one is the person should have a better credit record of either having paid the previous loans correctly without any default in the form of late payment, check dishonors or such other defaults.
The credit history of a person borrowing loans from the banks will reflect the promptness in repayment without any issues of late payment, default in payment, missing out to pay a monthly due, and non-fulfillment of any obligation as per the contract entered into while availing loan.
If any or all of the above issues, such as default in payment, late payment and such other things happen to be reflected in the credit history of a person while servicing the repayment of a loan, his/her credit history will be a poor one. Technically, such persons are not entitled to get any further loans from any of the financial institutions or banks for a certain period of time until their credibility lost is restored to the satisfaction of the lenders.
Any loan, either a secured loan or an unsecured loan, extended to persons having bad credit history tantamount to what is called as Bad Credit Loan, where the risk of recovery from the borrower is relatively difficult than other loans. Bad Credit Loans are extended by the banks to persons having poor credit history at a comparatively higher rate of interest than the normal interest charged to other customers having good credit history.
From the customer’s point of view, availing bad credit loans is very difficult and in case one person succeeds in getting the loan, then higher interest for those loans might have to be paid, which will result in higher cost of borrowing for the person.
From the bank’s point of view, the risk of non-receipt of payment from the customer, to whom bad credit loan has been extended, is much more and this additional risk is taken by some banks to earn extra interest in the short term, which might, in the medium to long term period, prove detrimental to the bank’s reputation. The recent fiasco in subprime markets in the US housing sector is a good example for cheap and bad credit loans.
