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Bad Credit Loans - The Risks Involved

Borrowing money is always associated with a number of common risks. These generally stem from people over borrowing, that is, borrowing more than they will be able to pay back later. What this means is financial disaster for the borrower as they may become bankrupt and lose their home and all their assets as a result. These risks tend to be exacerbated when the loans concerned are bad credit loans. There are ways however of identifying these types of dangers and reducing the chance of their occurring so if you are worried about the risks of borrowing, and would like to take some steps to reduce such risks, then read on.

Pre-Borrowing Steps

The first thing you should do, before ever borrowing any money, is conduct an assessment of your current financial situation. This should include looking at your current debt, how high is the current level and are you comfortable with it? How high are your monthly debt repayments and on what terms are the debts, for example are they fixed or flexible, high interest or low interest?

As well as looking at your debts, the other important thing to look at is your income. How much income do you have? Is it likely to rise, fall or remain the same? Is your job secure or is there a chance of you being laid off?

After you have looked at your overall situation, you will be in a much better position to judge whether or not you should be thinking about borrowing more money, and what type of loan you should be taking out. The assessment of your current debt is also very valuable for one other reason. It can indicate to you whether you should be considering taking on a debt consolidation loan. If you find that you have a lot of short term forms of credit such as credit cards, store cards or a bank overdraft, and you are paying a very high rate of interest on these, probably anything over fifteen per cent, then you may want to consider consolidating these debts into a new, lower interest consolidation loan.

Been Refused Already?

Another thing that will help you judge whether or not you should be looking at taking on new credit is the responses you are getting from lenders. It may that banks and other more traditional lenders are turning you away. If this is the case you will be only able to get credit from lenders that specialise in bad credit lending. They are likely to only be offering you credit at very high interest rates and on less than attractive repayment terms. If you find yourself being offered credit only from the least scrupulous lenders, who are offering you high interest rates and seeking security in return, then you may wish to ask yourself if you really are in a good position to be taking on new credit. You should look at the reasons the banks and other traditional lenders are refusing you credit and think about whether or not you should try and remedy that situation before applying for more loans.

Security on the Loan

One of the big risks with bad credit loans is that usually, they will be seeking security for the loan. This will invariably mean securing the loan over your home. The consequence of having a loan secured over your home is that in the even that you become unable to meet your repayment obligations, the lender will be able to step in and take possession of your home. They can then sell the home and use the proceeds of the sale to satisfy their debt. This is a very serious consequence of failing to make repayments and you should therefore only be ever considering taking on secured credit if you are comfortable that you will be able to meet all of the repayments as they fall due.

Higher Cost

Another risk with bad credit loans is that the interest rates are likely to be somewhat higher than other loans would be. So if you think you are able to make the repayments on say a ten thousand loan at seven per cent, this doesn’t mean you can afford ten thousand as a loan for those with bad credit will be charged at a much higher rate than seven per cent. The higher the interest, the higher your monthly repayments will be and the longer it will take you to pay off the loan, so be very aware of the different interest rates, or APRs you are being offered and find out exactly how much the loan will cost each month and how long it will take to repay the loan before agreeing to anything.

Purpose of Loan

The other thing you should look at is the purpose of the loan. Do you really think it is necessary? Is it to by a definite item such as a car or home improvement, is it to go on holiday, or is it just that you want some extra spending money? The reasons for the loan will tell you a lot about whether or not it is a good idea to be borrowing it at this time.

More Information

  • Bad Credit Loans - Our information on bad credit loans
  • Finding the Cheapest Loan - How do you find the cheapest loan? Through a combination of factors that include understanding your credit score, determining the best type of loan for your purposes, and shopping around
  • Deciding on a Loan - What is the one thing that all financial advisors tell their clients before committing to any financial agreement? It is the most basic rule of all commerce; do you homework and shop around.
  • Loans for Those with Poor Credit - Is it possible to obtain a loan if you have a poor credit score or even if you've declared bankruptcy? The answer is yes. However, not surprisingly, the loans available will have higher interest rates and restrictions that are more stringent.
  • Debt Consolidation with Bad Credit
    So you want start rebuilding the financial mess that you are in at the moment by consolidating all the loans and debt that you currently have. But what to do when you have bad credit and the debt consolidation company will not even lend to you?
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