How A Bankruptcy Loan Can Repair Bad Credit
Tom has been bankrupt, but his bankrtuptcy is now disolved. As a discharged bankrupt, Tom has decided to start building up his credit file for future needs. In a few years time, Tom will want to buy a new house, and so will need a mortgage. If Tom just waits, when he comes to apply for a mortgage, he will have no credit histroy and will have to pay huge interest rates on a mortgage loan for a long period (say 25 years!). As this will cost him a lot in interest rates, Tom has decided that he is best to start building back up his credit score so when the situation arises, his mortgage rate will be much lower.
Tom for the first time in years, can now afford a holiday. He has the money to pay outright, but decides that he future credit rating can be helped if he was to take a loan out. So he places all his available cash (In this example £1000 pounds) into a new bank account. He now approaches a company that gives ex-bankrupts loans and applies for a £1000 loan. When he has been accepted at an extortionate rate (which he expected) he books his holiday and pays for it using his loan.
All of the repayments Tom now makes, he uses his original £1000 but will have to find the monthly interest. Here is how it breaks down to use the loan if he pays as agreed:
| Amortization Table for £1000.00 borrowed over 12 months | |||||
| Month | Payment | Principal Paid | Interest Paid | Total Interest | Balance |
| 1 | £87.92 | £79.58 | £8.33 | £8.33 | £920.42 |
| 2 | £87.92 | £80.25 | £7.67 | £16.00 | £840.17 |
| 3 | £87.92 | £80.91 | £7.00 | £23.00 | £759.26 |
| 4 | £87.92 | £81.59 | £6.33 | £29.33 | £677.67 |
| 5 | £87.92 | £82.27 | £5.65 | £34.98 | £595.40 |
| 6 | £87.92 | £82.95 | £4.96 | £39.94 | £512.45 |
| 7 | £87.92 | £83.65 | £4.27 | £44.21 | £428.80 |
| 8 | £87.92 | £84.34 | £3.57 | £47.78 | £344.46 |
| 9 | £87.92 | £85.05 | £2.87 | £50.66 | £259.41 | 10 | £87.92 | £85.75 | £2.16 | £52.82 | £173.66 |
| 11 | £87.92 | £86.47 | £1.45 | £54.26 | £87.19 |
| 12 | £87.92 | £87.19 | £0.73 | £54.99 | £0.00 |
Total interest paid over the 12 month period is £54.99
So Toms £1000 holiday as actually cost him £1054.99, but has been stretched over twelve months ( in which Tom has hopefully earnt some interest back on his money in the bank!) This has had a good effect on his credit file, as Tom has shown to be able to pay credit agreements in full, every month and without fail. So what does Tom get out of paying an extra £54.99?
Imagine what will happen if Tom does this a few times! His credit rating is always improving and this shows when he comes to apply for a mortgage or higher level loans in the future. Buy building up his rating with small, short term loans that he can already afford, Tom will pay much less in interst on higher loans.
Instead of now having to pay 10/20% on a larger loan, Tom is working to being able to make use of "normal" offers like mortgage rates of 5/6/7% saving him thousands off his interest repayments on a mortgage!
When Tom goes for a car loan, instead of being forced into applying to the specalist companies who charge 29.9% (due to his bad credit rating), Tom can now approach a high street lender and apply for personal loans offering a more resonable rate of 6.9%.
