As of June 2019, U.S. adults were carrying $4.1 trillion in consumer debt. That number doesn’t even include home mortgages. It’s no secret that it’s often necessary to take out debt in order to get things you need, such as a car or education. But there’s a big difference between doing this with good versus bad credit. So, what are the risks of taking out loans with bad credit?
You’re Going to Face Higher Interest Rates
There are a few really important things to consider when you’re taking out a loan. The first question you should ask is whether or not you’ll be able to repay the amount you want to borrow. If you’re wanting something that’s simply out of your price range, it’s wise to just move on even if you are approved for a loan.
This is the second question you need to ask yourself: “How much am I going to be paying in interest when I repay this loan?” Interest is a key consideration when it comes to borrowing money that can easily be overlooked at the moment. It can make a massive difference, especially over longer-term loans. The reality is that people with bad credit are going to have to pay higher interest rates.
Why is this? It certainly seems a bit unfair that people who have good credit are already going to have an easier time repaying their loans. To understand this, it’s essential that you try to look at the situation from the perspective of the lender. Their goal is to make a profit by borrowing money to people, which will then get paid back along with a bit extra. People with good credit have shown that they tend to repay their loans. Lenders want to give these people money, as it’s a pretty safe bet they’ll get paid back.
When it comes to individuals with bad credit, lenders see this as a substantial risk. So, to compensate for this inherent risk, lenders charge higher interest for people with bad credit. As much as that stinks, it’s just the reality of the situation. Fortunately, making consistent payments on borrowed money tends to steadily raise your credit score. Doing this can help you get more favorable rates in the future. But it doesn’t change the current reality of having to deal with high rates.
You Might Need to Seek External Help
The thing that’s unfortunate about having to take out loans with bad credit is that you’re at a disadvantage. When you have poor credit, you’ve likely already struggled to pay back loans in the past. Having to take out another loan with high interest isn’t going to be an easy thing to take on. There’s a chance you’re going to end up in a position where you need to seek out help. Once you’ve fallen behind on payments and your loans go to collections agencies, your world can get turned upside down by stress coming from all directions. Many people have to resort to bankruptcy, which will even further damage your credit and stay on your report for at least seven years.
Fortunately, there are resources that exist specifically for people in this situation. The first step is often to contact a credit counseling group. They can give you some helpful free information, such as budgeting tips, as well as point you toward other helpful resources. It’s possible that you’ll need to opt for a debt settlement or consolidation plan at some point if you’re unable to repay your loans. Organizations such as Freedom Debt Relief have consistently shown their commitment to helping consumers reduce or beat their debt through these kinds of repayment systems.
It’s hard to make things work financially when you’re working with bad credit. This is especially true when you need to get money through a loan. It’s important to know the risks before you take out a loan with bad credit.