Imperfect Credit Programs

An imperfect credit program is really just a lender who is willing to issue loans to people with a poor credit score and/or a history of bad credit or a bankruptcy in their backgrounds. Banks and brokers who issued all those “subprime” loans that are making headlines these days are examples of people in the loan business who have imperfect credit programs. Perhaps its unfair speculation, but it may be possible that all these defaults on subprime loans are more the responsibility of the lender than the borrower. The professionals that issued these loans knew exactly what they were doing. They were aware that people with a history of financial difficulties are not good candidates for mortgages that effectively put them in over their heads.

So let’s define an ‘imperfect credit program’ as one that balances the financial capacity of the borrower with the loans, the rates, and the loan costs that are available. An effective imperfect credit program should be one that helps keep the borrower right side up on the loan instead of putting him/her in a position that will be untenable once the ARM they’ve taken on adjusts.

Loan companies that make their marketing theme “bad credit OK” probably aren’t the best choice when you’re shopping for a loan. These are companies that find high risk acceptable; that means that they are willing to accept a certain level of default and are going to charge a premium price for a loan because that’s their goal – sell the loan regardless of the client’s worthiness or ability to pay over the long term.

Loans issued under bad credit programs can also tend to have some unsavory clauses tucked into the fine print. You may find a substantial penalty for prepayment. If you take out a mortgage at 11% and five years later you’ve improved your credit rating to the point that you qualify for a better deal, it should not cost you thousands to retire your original mortgage. A quality “bad credit program” should not make prepayment penalties mandatory.

People with good credit are just as susceptible to borrowing over their heads as people with bad credit. However people with good credit are more likely to be able to refinance out of an overextended financial situation than people with a mixed credit history. So a good “bad credit program” should provide advice to the potential borrower on the impact of the loan that he/she is seeking. Can you manage the monthly payments once the ARM adjusts? Are you planning to refinance out of this loan at some point? These and similar issues should be addressed in a bad credit program.

Loan brokers and bank officers who see potential problems for the consumer should spell them out and keep the discussion firmly rooted in reality. Find a loan provider who will tell you what he/she thinks your limits are.