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What to Consider When Considering High Risk Loans |
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High risk loans may be your only option if you have a bad credit score, however, these types of loans are not right for everyone. There are many sides of this issue to consider before you take out a high risk loan. The most prominent downsides of high risk loans are that they often carry a high interest rate, have many fees, and are often for a very low loan amount. You likely won’t see a five digit amount with these loans and many are below $3,000. There is also a hidden downside …
'Finance' Companies & Their FICO Impact Another downside to these types of loans, which is often overlooked, is the fact that going through one of these high risk loan companies -- often referred to as 'finance' companies -- will have a negative impact on your FICO scores. The FICO algorithm takes points off of your score for going through one of these finance companies, rather than through a recognized bank. Also, when other lenders see that you have used one of these companies, they are less likely to extend a loan to you later on down the road. They see that you were 'hard up' enough to take a loan from one of these companies and view that as evidence that you don't have complete control of your finances, which may lead you to default on their loan. For this reason alone, before you take out a loan with one of these high risk loan companies, it is important for you decide whether taking this step is worth risking your reputation with other banks later on. The Advantages of High Risk Loans Although high risk loans have many downsides, there are also several advantages to obtaining this type of loan. Firstly, this may be the only place that you can go to get the money you need. If you find yourself in a tough financial spot, and have an emergency that requires extra cash, taking out one of these loans may be your only option. In this case, higher fees and a negative impact on your FICO scores is really not going to have that much of a difference in your decision. Secondly, banks may make you jump through hoops in order to get your loan, whereas high risk loan companies often will give you a loan much more quickly. Therefore, if time is an important factor, a personal finance company may be better for your situation than a bank. The quickest way for you to obtain a high risk loan is to get a payday or title loan. You can usually walk into one of these loan companies and walk out with your money in as little as 15 minutes. Usually all you really need is your employer contact information -- so that you can prove that you actually have a current job -- and either your most recent paycheck stub or the title to your vehicle. The fees associated with these loans are also much higher than even regular high risk loan companies charge. Let this kind of loan go for even a few months and you can end up paying up to two or three times the original loan amount. The Secured Loan Alternative For a high risk loan that is not as expensive, you can also check into a secured loan. With this loan, you can take something that is valuable and has worth and put it up as collateral in exchange for the money that you need. That way the company knows that, if you do default on their loan, they have a way to get their money back. This collateral may convince a high risk loan company to give you a loan that they otherwise would not. The interest rate may even be much lower on a secured loan, since you are less of a risk to the company because you have put up collateral. All in all, the decision to take out a high risk loan should not be taken lightly, because they can have potential negative ramifications for both your financial and credit situations if you default on the loan or get so behind that you are unable to catch back up. If you do decide to take out a high risk loan, it is important to find out all that you can about the loan and its terms -- as it is better to know what you're getting yourself into before you sign any papers, than to go into a high risk loan agreement blindly. |
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