High Risk Loans
High-risk loans are loans where there is a doubt about borrowers capacity to repay. These are also called bad credit loans. Bad credit is a term used to describe a poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. Bad credit can result in being denied credit. A lender will be much more interested in repayment capacity of the borrower than any thing else. He will carefully examine all aspects of income of the borrower and equity upon which loan amount and loan period depends. The other things that matter are
b) Credit rating of the borrower,
c) Stable income.
If the borrower has bad credit history and do not have anything to offer as collateral, than lender may have second thoughts about the borrower as lending to such a borrower could be highly risky. Borrowing money is always associated with number of common risks. These generally stem from people over borrowing. What this means is financial disaster for the borrower as they become bankrupt and lose their assets as a result. These risks tend to be exacerbated when the loan concerned are bad credit loans. The lenders take advantage of such situations of high risk and impose unbearable terms for such high risk lending.
Lenders have their arguments favoring high price for high risk loans. In credit risk management a usual goal is to price loans according to their risk exposure. Lenders should be compensated for the risk that the borrowers do not repay their loans. There is always a relationship between terms of lending and risk involved. That is why a lender seeks higher rate of interest under such conditions as a reward for taking high risks. High rate of interest and short repayment periods are the main characteristics of high-risk loans. The reason for high rate of interest is that, lenders feel insecure and high rate of interest will help them recover the loan amount. This practice of charging more in the form of higher interest rates and fees
for extending loans to borrowers identified by the lender as posing a greater credit risk is called risk based pricing. The lending industry argues that risk-based pricing is a legitimate practice; since a greater percentage of loans made to less creditworthy borrowers can be expected to go into default, higher prices are necessary to obtain the same yield on the portfolio as a whole. Some consumer groups argue that risk-based pricing is an excuse for price gouging vulnerable consumers. They argue that higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk.
The basic idea is that more-risky borrowers who are more likely to default should pay more interest to avoid default in repayment. But this a sort of punishment to those who have never defaulted and never will. Risk-based pricing is a universal practice in bond markets and the insurance industry, and it is implied in the stock market and in many other industries. Risk-based pricing allows lenders to lend to a group they would not otherwise lend to; the higher interest rate compensates for money lost due to the higher-than-normal default rate. Some people believe risk-based pricing is unfair in principle. There are also some who, while agreeing that the rates are generally set fairly considering the risk that the lender assumes, feel that it is not good to allow borrowers with credit problems to take out such a loan. Some believe that risk-based pricing is fair but feel that many loans charge prices far above the risk, using the risk as an excuse to overcharge. These criticisms are not levied on all products, but only on those specifically deemed predatory. Proponents counter that competition among lenders should prevent or reduce overcharging.
Bad credit loans could be secured or unsecured. If borrower can offer collateral against the loan, than he can avail secured bad credit loan. As there is no risk factor lender, the interest rate is less. But borrower needs to be careful as a default from his or her side could be dangerous. But if borrower does not have anything to offer as collateral than borrower can avail unsecured bad credit loan. Borrower will have to bear high interest in such case.
In some parts of lending business high risk lending is known as Predatory lending. This lending is a sort of practice of convincing borrowers to agree to unfair and abusive loan terms. Although the predatory lending industry is most likely to target racial minorities, women, and the elderly, victims of predatory lending are represented across all demographics. Predatory lending normally occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on payment, the lender can profit by selling the repossessed or foreclosed property. Other types of lending sometimes also referred to as predatory include payday loans, credit cards, and overdraft loans, when the interest rates are considered unreasonably high.
The argument advanced for high price on high risk loan is bad credit of the borrower. Since credit rating is the key factor in determining the risk associated with a loan, the borrower will probably pay a higher interest rate on any loans than those with perfect credit. But there is a remedy to escape this catch if some one is already in the web of paying high interest because of bad credit. A secured, sometimes even unsecured debt consolidation loan can very often be a lower interest rate than most of the loans borrower would be consolidating into it. Consolidating debt is very often a wise move to lowering monthly payments. Often, too much debt and too many monthly payments to keep up with can be the ultimate reason for one\'s bad credit. Even if some one has a bad credit, debt consolidation can help reduce monthly payments by lowering your interest rates. Where credit cards and other unsecured loans charge interest rates often in excess of market rates, debt consolidation loans can offer much more reasonable interest rates. In addition, all those monthly payments can become very easy to manage.
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