It may seem ludicrous that lending institutions are willing to approve $10,000 personal loans for people with bad credit when the risks involved are so high. After all, does a low credit score not indicate a lack of trustworthiness on the part of the borrower? Does it not mean that the loan is almost certain to be defaulted upon?
Well, the short answer to both of those questions is: No. There is a general misconception that a low credit rating means the applicant cannot be trusted, and so lenders who provide large loan approval are asking for trouble. The truth is that the economic crisis has seen many honest people develop poor credit ratings.
This has forced a change in thinking amongst lenders, with the reliance on credit scores is no longer particularly strong. These scores are only used as an indication of what the best interest rate to charge is. Only then can it be calculated if the $10,000 personal loan, for example, is affordable.
But how are such large loans affordable for these applicants, and how can lenders avoid making huge losses?
How These Loans Are Affordable
Calculating whether or not a loan is affordable comes down to two factors: the income and the interest rate. When it comes to $10,000 personal loans for people with bad credit it might seem that the application is doomed, but in fact this is not always the case.
The interest rate is influenced by the credit score of the applicant. The simple rule is that the lower the score, the higher the interest rate. This can translate to a difference of a few hundred dollars in monthly repayments. A borrower with an excellent score of 700 may pay $500, while a borrower with a low score of 450 faces repayments of $750.
Large loan approval might seem out of reach for the latter, but what makes these repayments affordable is not the income that is earned, but the amount of income that is free to cover the repayments. To this end, the debt-to-income ratio on a $10,000 personal loan is essential.
The Debt-To-Income Ratio
This ratio is used as a guide by lenders to ensure borrowers are not allowed to over-extend themselves. While $10,000 personal loans for people with bad credit can be a lifesaver in these difficult times, repaying the loan can become difficult if some unexpected bills come through the door.
What the ratio does is protect the borrower by ensuring a percentage of their income remains available for such eventualities. So, medical bills after a sudden illness can be paid, for example. Only when this is protected can a large loan approval be deemed possible.
The debt-to-income ratio is set at 40:60, which means that no more than 40% of the available income can be used to repay the $10,000 personal loan. So, an applicant earning $5,000 per month may not get the green light, while an applicant on $3,000 might be approved.
Realistic Loan Applications
Every time a lender approves a loan, they are putting themselves at risk. It is the nature of the game. So, it is fair to believe a $10,000 personal loan for people with bad credit is asking for trouble.
But with debt-to-income ratio and interest calculation taken into account, they have protected their interests quite well. The only remaining aspect is to entertain only realistic loan applications. Large loan approval is fine so long as the large sum is not a crazy amount.
For example, while a $10,000 personal loan may be approved for an applicant with a poor credit history, the chances of approving a $50,000 loan are extremely low – unless there is collateral provided, of course.