High Risk Lenders
High Interest Rates means you are at High Risk
It’s common knowledge that lenders who charge high interest rates will give personal/consolidation loans to individuals who do not qualify for loans elsewhere. They charge these high rates to make a profit because they are dealing with high-risk customers and therefore a significant number of their customers do not repay their loan.
Many times the individual taking out the loan is doing so to solve a debt problem, but the loans may become a big part of the problem because of the high interest rates and because they often require liens on assets as security for the loan and/or co-signers.
A $5,000 loan can mean your payments total almost $10,000
Some finance company lenders charge as high as 30.99% interest. At these interest rates on a five-year loan your payments are almost twice as much as you borrowed. Often these lenders include some form of insurance and other fees that drive the cost of the loan even higher. If you take out a loan and pay high interest rates, the extra interest you are paying is in effect paying for the lender’s customers who don’t repay their loans.
Giving them rights to your assets
Another concern is that some of these lenders ask for liens on vehicles, furniture and household effects that generally have little value. A lien gives the creditor the right to seize your asset. Under provincial law, these are assets that are exempt from seizure by creditors unless the owner gives a lien to a lender; in other words the government allows anyone to keep these assets, even in bankruptcy, because they are necessary.
In our opinion these lenders only want the lien on the assets because it gives them the right to warn of seizure of these assets and force payments from a customer if a payment is missed. This lien also gives them rights to the assets that survive in bankruptcy and proposals.
Pay them even more of your money
These types of lenders are also usually quite willing to lower the monthly payments if a customer have problems paying, which extends the length of time you pay. There are usually fees involved and this also increases the length of time to repay the loan and the total amount of interest you are paying. That is why they are willing to extend the payments, because they can make more money from you.
High-risk lenders may insist on having a co-signer
If so, they are questioning your ability to repay the loan on your own. Before getting a co-signer to sign, you must consider the possibility that if you can’t pay the loan the lender will demand the entire balance from the co-signer. This is the last thing you would want to do to your friend or relative. You must be certain that the loan is the solution and does not cause further problems.
In certain circumstances a loan from a high interest rate lender may be what is necessary, but you must be very cautious. If you can only get a personal loan from a lender that is charging more than 12% interest and/or wants basic assets as security for a loan and/or demands to have a co-signer, you need to step back and assess your financial situation in more detail. Are you doing something that will help or hurt you? Are you solving a problem or creating a bigger one?
Some McLay words of advice around high-risk lenders:
- Be cautious dealing with mortgage brokers, and all lenders, especially higher risk lenders, regarding the potential costs related to personal loans. Ask a lot of questions about interest rates, fees, required insurance premiums, any others costs or fees, the length of time the loan will take to pay, and the total of the payments including interest.
- Do not feel obligated to sign anything before leaving the lenders office. Consult with a credit counsellor or other trusted person before signing anything with a lender. Just because a lender will advance you money does not mean you can repay it. You need to do your own budget, be realistic about expenses, and allow contingency money for unknown events. You need to make sure the loan is the solution and does not cause further problems.