The fact of being classified as a high-risk borrower can come as a shock to many people, and, to say the least, the implications of such a designation can be far-reaching for a person’s financial options. Even though the high-risk label usually results from a bad credit rating, it can be assigned for other reasons as well. People who have recently moved to their current address, or have started a new job, for example, can also be considered high risk, even though their payment record is excellent, and their management of financial matters has been totally responsible.
Others, like recently graduated students or new immigrants, may also be financially responsible people, but it is a question of having no credit rating. They too may find themselves in the high-risk category. However, special personal loans with certain conditions attached are usually available for consumers who require credit, but are considered high risk by banks and other financial institutions. Financially responsible people with a high-risk credit rating should not hesitate to apply for such a loan.
Lenders do not rate all high-risk borrowers equally. In cases of fraud or bankruptcy, or where a court case is involved, obviously, financial institutions must carefully consider the risk of lending money, but in other cases, like that of new residents or the newly employed, lenders are aware that the risk is much more acceptable. It is because of the different circumstances between individual consumers that the credit rating system was devised. Lenders can refer to this rating to help them make appropriate judgments concerning the reliability of those who apply for credit.
Potential borrowers with a high-risk rating should be aware of their credit score before applying for a loan. Individuals are graded on a scale from A to D, where A is assigned to the best risk and D to the worst. The letter grades correspond to a numerical score which is calculated from a person’s financial history. Previous loans, current debts, repayment records, and debt-to-income ratio are all taken into account. If there is no credit history, this is taken into account as well. Anyone with a credit score between 500 and 600 can expect to be considered high risk.
Financial institutions provide loans to high-risk borrowers at higher interest rates than those offered to low-risk clients, in order to compensate for the possibility that some loans may be difficult to recoup. Security is usually required for a high-risk loan, but even if there is no such requirement, security should be provided if possible, as this is one sure way to reduce high interest rates. Real estate is the best form of security, but any other property of value, like a car or trailer, can be used to make the terms of the loan as manageable as possible.
High-risk borrowers who are aware of their status before approaching a financial institution, can be well prepared for the stricter conditions associated with high-risk loans. A number of web sites contain pertinent information, and it is useful for borrowers to consult these for examples of the terms and conditions that typically apply. Hints and suggestions about how to reduce the most severe penalties are readily available.
It is always better to be well informed before completing an application for a high-risk loan. This way there are no surprises, and the new client will be in a good position to obtain the best possible accommodation.