The dangers of high interest loan agencies.

When a financial emergency arises, are you prepared to handle it? For many, the answer is no. The rising prices of necessities and higher interest rates have made it more difficult for people to afford the basics, let alone prepare for unforeseen situations. If you have no funds to rely on, and possibly a lower credit score, it might be tempting to borrow from a high interest loan agency to help you in trying times, however, they come with significant risks and drawbacks that need to be considered.

1. High interest rates –High interest loan agencies can have rates that can be as high as 46.99%. That means borrowers end up paying a substantial amount in interest, making it challenging to repay the loan quickly. For example, when using the payment calculator on one of the many loan agency websites, when borrowing $5,000 with an interest rate of 34.99%, your payments would be $309.33 monthly for 42 months. At the end of the 42 months, you would have paid a total of $12,9991.86, meaning you would have paid $7,991.86 in interest, to borrow $5,000.00. 

2. Increased debt burden – Due to the high interest rates associated with these types of loans, monthly payments can be challenging to manage, especially for individuals with limited income. If you accept a loan with a higher monthly payment, it could prevent you from getting ahead financially due to the lack of funds available to contribute to savings and paying down other debt. 

3. Borrowing cycle – When borrowers are unable to get ahead due to large debt payments, possibly due to other high interest loans, credit cards, vehicles etc., they may find themselves trapped in a cycle of borrowing to be able to cover ongoing loan payments, leading to a vicious cycle of borrowing and increasing personal debt levels. 

4. Risk of default – The combination of high interest and large loan amounts can increase the risk of default for the borrower. If the borrower is unable to keep up with the loan payments, they could potentially face penalties, additional fees, and damage to their credit score. 

5. Limited flexibility – High interest loan agencies may offer less flexibility in terms of repayment options compared to traditional lenders. This can make it difficult for the borrower to adjust their payment schedule or seek alternative arrangements during financial difficulties.

6. Impact on credit score – As mentioned above, if the borrower defaults on payments, it will damage their credit score. This can result in making it harder to access affordable credit and financial products in the future and affecting long-term financial health. 

High interest loan agencies may be able to provide access to credit for individuals with limited options, however, borrowers should carefully consider the risks associated with these loans and explore alternative options whenever possible. Its also important to read and understand the terms and conditions of the loan agreement before signing.

If you have found yourself in a position where you have had to take on high interest loans to help in a difficult situation, there are options. 

If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person. A conversation free of judgment is the first step to determine options for debt that make sense to you. For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.