Bad credit is a widely used term in the global lending industry. There are various factors that are responsible for bad credit records. The interest rates for bad credit loans are higher than the other loan options due to the higher amount of risks associated with this type lending. Explanation of Bad CreditThe term bad credit means a bad credit history of a particular borrower. If a borrower has a bad credit history or score it means that the particular individual has been negligent with the payment of his dues. Bad credit implies that the debtor may not be trusted by a lender while lending money. Causes of Bad Credit There can be several reasons as to why a particular debtor has a bad credit record. The most commonly found reason is that the borrower has not been able to make his payments as per the time specified in the credit contract. Yet another reason could be that the borrower has not been able to pay the debt back at all as a result of lack of assets to cover his debts. That means that the debtor might have become bankrupt. Bad Credit Record and Credit Risk In the present day financial world and especially in the lending industry the term bad credit is an important one. The lenders provide their loans on the basis of the factor of credit risk. The term credit risk implies the potential of loss that is associated with providing a loan to a particular borrower.
The lenders perceive that in case of a borrower with a bad credit record they stand a greater possibility of losing out on the repayment of debt. That means in certain cases if the lender provides a loan to a debtor with bad credit the rate of interest is almost sky-high. This is done to cover the credit risk that is associated with these borrowers.
In other occasions the lenders refuse to provide a loan to a borrower with a bad credit record. The main reason behind that is they feel they might not recover the money they have lent to the borrower.
Last Updated on : 9th July 2013