Maxing Your Credit Card is a High Risk Personal Loan in Reality

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The floundering economy has led many people to seek high risk personal loans in an effort to reduce the costs of their credit debt. This is a new area of lending for many consumers who had no problems paying their monthly payments on credit cards in the past.

Some months you might be able to pay off half of you credit card charges but relatively few people routinely pay their statements in full each month. Most of us charged more than we could afford to pay for in cash and assumed we could stretch our payments out over many months.

It worked because we had good credit and our interest rates on credit card accounts were often 9%-12%. The finance fees didn’t seem oppressive and we thought they were worth the convenience and spending power of a wallet filled with credit cards.

Banks appealed to the public by offering rewards and bonuses for those who frequently used their plastic cards. There were no annual fees and rates were raised only if you failed to make your payments on time.

Credit Card Crisis

When changes in credit card lending practices occurred, they began gradually. First, those who made only the minimum payments on accounts each month found their interest rates were slowly rising. Those who used more than 50% of the spending limit on a credit card account had the same resulting increase in APR.

These were not one time APR increases but increases that occurred almost every month. Slowing the APR rose to 18-20% and a single late payment could result in the APR jumping from 9.9% to 32.9% in some cases.

When consumer complaints led to new lending regulations lenders were given 14 months to adjust their business models to meet the new regulations. This window provided an opportunity for credit lending banks to reposition their accounts in order to protect profitability.

Consumers with good credit and bad credit alike found their spending limits decreased and their interest rates jumped to more than 20% overnight.

Only consumers with the highest credit ratings were exempt from these changes and even some who had FICO scores in the 750 and high range saw their interest rates increased on multiple credit cards.

Seeking Alternative Ways

Faced with monthly payments that had more than doubled due to changing interest rates, consumers began to seek ways to pay off crushing debt quickly.

For many, a lowered spending limit had further damaged their credit score as reducing the amount of money available on the credit card increased the person’s apparent debt to income ratio.

High risk personal loans began to gain popularity. These loans in the past were relegated to those with risky credit and often were a consumer’s last ditch effort to avoid filing bankruptcy. Interest rates on the loans were high and the terms were not as good as those offered for personal loans from standard banks.

Sources of High Risk Personal Loans

It is interesting that high risk personal loans have been available to consumers for many years. Many of the lenders went out of business due to the lowered standards of credit card issuing banks that granted credit cards even to people with poor credit scores.

Such loans were once a replacement for a credit card but that’s no longer the case. If you have a credit card, high risk personal loans added to your debt can be a risky choice to make.

Store Front Lenders

Loans for people considered to be high risk due to low credit scores have been available for many years. These were usually offered by store front lenders with nationally recognized names.

Credit was checked when you applied for such a loan but your credit did not have to be perfect to obtain a loan. Signature loans were not often offered by these loan companies but collateral of almost any kind was often accepted.

The most common collateral used was personal possessions. If you own appraised antiques you could get a loan using it as collateral. If you had art or jewelry or anything else with an appraised value, you had collateral.

Most people who visited store front lenders for high risk personal loans had only their household furniture, appliances and clothing and that was accepted as collateral for a loan.

If you failed to make your loan payments, workmen hired by the lender would show up and cart off your furniture to be sold to pay your debt. Strangely, the consumer complaints concerning these store front lenders were not overwhelming.

The terms of these loans were not the greatest but the companies filled a need that matched later high risk loans.

Title Loans

Often associated with a payday loan company, title loans are definitely high risk personal loans.

If you have a vehicle that is paid for, you hold the title to that car or truck. A title loan company will loan you money based on the market value of your vehicle and will hold the title in their possession until the loan is paid in full.

Title loans are often referred to as scams but the borrower knows the terms when he obtains the loan. He also retains use of the vehicle as the lender hold the title but not the car itself.

Interest rates on title loans are extremely high. This is balance by the ability to pay the interest and continue the loan and it is this “benefit” that has led many people to lose their vehicles to repossession.

Title lenders in states that allow the loan to be renewed may choose to accept the interest fee and renew the loan or may choose not to do that. If the lender refuses to extend the loan for a new term, the amount of the original loan plus interest is due in full immediately.

Consumers with poor money management skills often assume their title loan can be renewed again and again. When the lender finally refuses to extend the loan term the owner of the vehicle is surprised and seldom has the money to pay what he owes. The lender takes possession of the car or truck and sells it to settle the debt.

Payday Loans

High risk personal loans taken with cash advances can’t compare to the APR charged by payday loan companies. The premise is a simple one. You do not need to have anything more than a regular job and an address to qualify for a payday loan.

You can obtain $100-300 in cash in a few minutes and once you have filled out all the paperwork you can obtain such a loan immediately after the previous loan has been paid.

The loan term is 2-3 weeks and payoff can be made in person or the loan company will run your personal check through your bank account when the loan is due in a couple weeks.

To financial experts, title loans and payday loans are the worst possible way to obtain money when you need it. Many states have banned both of these loan types and others have added regulations to limit the amount of money that can be obtained through such a high risk personal loan.

Consumer groups disagree with the experts. They point out that for many consumers a payday loan is the only method available to obtain emergency funds.

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So, Are They Worht it?

Well, high risk personal loans are most often considered the cash advances you might take using your credit card. Those cash advances are high risk personal loans in reality and carry the highest interest rate charged by lending institutions.

Any time you obtain high risk personal loans you will pay higher APR and the terms will not be as beneficial as a standard personal bank loan. However, if you operate on cash rather than credit card, high risk personal loans may be the only method you have to obtain cash when you need it.