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5 Dangers of High-Interest Loans

For many people in financial trouble, an unsecured loan to pay off debts can feel like the only option. Unfortunately, such loans usually require a great credit score and healthy financial history in order to get one with low interest. For the majority of people, these types of loans are often dangerous high-interest loans.

High-interest loans can be a temporary fix for people able to get their financials in shape within a relatively short time, but for many people, these loans cause more trouble than they help. There are many potential problems you could run into after securing this type of loan, but the following five dangers of high-interest loans are the most important to keep in mind before making a rash decision.

5 Dangers of High-Interest Loans

If you are considering a high-interest loan, these five dangers may make you think twice.

  1. You pay much more than you borrowed over the term of the loan. The biggest problem you face with a high interest loan is that you commit to paying off significantly more than the principle over time. Since most people take out these types of high-interest secured or unsecured loans in order to deal with other debts, you may only be worsening the problem by taking on more debt. In addition, you may face much higher payments each month than you currently owe, due to the shorter terms of most of these loans.

  2. You face huge penalty APRs if you default. If you miss a payment, you not only face collections calls and other potential harassment, but you also will be forced to pay interest for a significant period that is even higher than the current huge interest you currently owe. When penalty APR kicks in, many people who were already struggling financially lose all ability to handle the payments at the new higher rate. This can create an out of control debt spiral.

  3. You are taking on a loan that the bank does not think you will be able to afford. The reason you are being forced to pay such a high interest rate is usually because the bank has assessed your risk of default to be very high. The high rate is the bank’s way of helping cover itself. If the bank does not think you can handle the loan, there is a large chance you are going to have a hard time paying the monthly payments over the long-term.

  4. You risk falling even more in debt. Essentially a high-interest loan to consolidate debt is a temporary stopgap. Without a real plan to pay it off, you only continue a risky financial cycle. No matter how many times you consolidate or move around your debt, it is not going to go away simply by ignoring it. You must be realistic your financial situation and be honest about whether or not the high-interest loan will be able to accomplish the goal of eliminating your debt.

  5. You could lose your collateral or face legal battles upon default—which is likely. Again, historically default on high-interest loans is common. This means that you are putting yourself in a position where being unable to handle the loan payments is likely. If this happens, you can lose any collateral you put up on a secured loan. Even if you take out an unsecured loan, you face potentially protracted legal battles with creditors and a hit on your credit score. This not only costs you additional time and money, but also puts a strain on all parts of your life.

As you can see, high-interest loans carry serious risks that you should consider fully before agreeing to. The dangers of high-interest loans rarely are worth the benefits when you are truly overwhelmed by debt. No matter what your financial situation, you have other options. If you are drowning in debt and looking for a solution, call the Cleveland bankruptcy lawyers at Luftman, Heck, & Associates today at (216) 586-6600 for a free consultation. We will be happy to present you with all your options, so that you can choose the best one.

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