Authored by Kate Beswick in Loans
Published on 09-12-2009
Sometimes people find themselves in times of financial difficulty and need some extra cash to get them out of it. In this case, people with good credit can usually apply for a personal loan, using their home or other assets as collateral. Sometimes if a person has good credit, collateral may not even be needed simply because their credit history reflects that they will repay the loan. But those individuals who can’t get a loan because they either have no collateral to offer or because they have bad credit are in a much different situation. Because of this, a high risk loan for bad credit might be the right solution.
High risk loans for bad credit are just that. They apply to people who don’t have a good credit history and they are a high risk for the lender. These types of personal loans come at a much higher risk to the lender because they don’t have any collateral that can be taken should the borrower default on the loan. They are also high risk because these loans are designed for people who have bad credit history and have missed several payments to other lenders in the past. Because there is such a high risk for the lenders with bad credit loans, these loans are usually for a small amount of money and are expected to be repaid within a reasonable and fixed time frame.
Because high risk loans for bad credit are for only a small amount, they are best suited for those that find themselves in a financial emergency. The loan will be enough to see the individual through the emergency but won’t be so much that the borrower could buy extravagant items, such as a home. This also ensures that the borrower won’t get in over their head and spend money that they simply won’t be able to pay back within the short time frame.
The lender in turn, doesn’t need to worry as much about high risk loans hanging over their head because the loans are only given for a short period of time. However, with no collateral being asked for, the lenders do need to benefit from high risk loans as well. Because of this, these loans come with astronomical interest rates that are much higher than lower risk loans. This allows the lender to still make profit from providing the loan, and helping someone out of an urgent financial situation.
High risk loans are ideal for people with bad credit who need help with unexpected expenses or suddenly find themselves laid off from work. However, they need to be entered into very carefully. Because these loans do carry such high interest rates, the borrower will end up paying much more in the end than the original amount of the loan. The general rule of thumb with high risk loans for bad credit is that they are a good solution if the borrower can determine that the financial situation is temporary. A clear plan to repay the loan in a timely manner needs to be set into place before these types of loans are entered into. Otherwise, the loan will just worsen the situation instead of bettering it.