Are Bad Credit Unsecured Loans a Good Idea?

Does Adverse Credit, Loan Defaults or a CCJ Mean High APR?

Jan 29, 2009

Bad credit unsecured loans are used to consolidate debt. The high APR, because of a CCJ, loan default or missed payment, makes adverse credit loan repayments more costly.

Adverse credit can occur due to a number of reasons, including: late loan payments, missed loan payments, loan default, a CCJ, Individual Voluntary Arrangements (IVAs), debt management plans or even personal bankruptcy. Bad credit unsecured loans are often used to consolidate debt and reduce monthly loan repayments.

Bad Credit Unsecured Loans and High APR

Consolidating debt when good credit exists helps to lower personal debt. However, a bad credit unsecured loan regularly only serves to exacerbate financial difficulties. Bad credit equates to higher risk to lenders. Consequently, they charge a high APR on bad credit unsecured loans.

Many doorstep lenders charge 50-60% on bad credit unsecured loans. Worse still, Payday loans -- a no credit check loan -- charges borrowers upwards of 1000% APR. This means that those struggling with financial difficulties and adverse credit will be paying back huge amounts of interest.

Debt consolidation should normally only be the practice of those with good credit. How is it possible to reduce monthly repayments when paying such high APR on money borrowed? Those with financial difficulties may be better served pursuing a debt solution, such as a debt management plan, personal bankruptcy or an Individual Voluntary Arrangement (IVA).

Creditor Harassment and Bad Credit Unsecured Loans

The incidence of creditor harassment associated with loan default is vastly higher when dealing with bad credit customers. Lenders are quick to sell on debt to a debt collection agency for 20% of the loans value and write-off the remainder against their taxes. The debtor is then pursued relentlessly and sometimes unlawfully for unaffordable loan repayments.

Bad Credit Unsecured Loans vs. Bad Credit Secured Loans

Banks are prepared to lend higher amounts to bad credit loan customers when taking out a secure loan. They will also ask for a lower rate of APR on a bad credit secured loan comparative to a bad credit unsecured loan as they have collateral.

However, is it really a good idea to turn unsecured debt into debt secured on the family home? It only serves to increase the chance of property repossession in the event of further financial difficulties. Once a debt is secured on a property, it is no longer possible to pursue a debt solution, such as a debt management plan or IVA.

Instead of taking out a bad credit unsecured loan, why not just go without the item for a while and save up for it instead? Rather than consolidating debt, why not consider a debt solution instead? Try to avoid turning unsecured debt into secured debt as it reduces any options considerably.

The copyright of the article Are Bad Credit Unsecured Loans a Good Idea? in Personal Loans is owned by Asa Ghaffar. Permission to republish Are Bad Credit Unsecured Loans a Good Idea? in print or online must be granted by the author in writing.