The former usually has lower interest rates and a user-friendly period of repayment. The latter, however, has higher interest rates and less comfortable conditions for the borrower, yet, people still ask for them. So, why would anybody take a bad loan?
Decreased salary and old debts
The most common situation when someone takes a bad loan is a negative change in their income. For instance, when somebody gets a raise, they decide to buy a new car. However, after a while, their company gets into financial difficulties and their salaries are cut. Since they can’t pay the same monthly instalments like before, they have to go for a loan revision. The other side, i.e. the bank, will protect themselves by approving this new loan, but with a higher interest rate. However, no matter how painful this may seem, it’s smarter to just accept the new terms and get rid of the loan as soon as possible. The alternative is selling the item purchased with the borrowed money and pay back the entire loan at once.
Family issues
Since the living conditions of every family might change over a period of time, every loan brings a certain amount of risk. The most common loans that end in tears and fights are home loans. People who are getting divorced have to split their mortgage. Still, driven by their emotions, more often than not they can’t reach a compromise. So, if they can’t make a deal to sell the property, one side has to take a loan (usually a bad one) to pay the other side their share of the mortgage. Read more about what can happen to a mortgage during a divorce here.
As opposed to that, sometimes families have to face some extremely difficult situations, like severe diseases. If they don’t have enough savings, they need to borrow money for the treatments. Since this is a specific condition, a bad loan could save someone’s life. If this is the only solution you have, just take it and hope for the best outcome.
Bad loans fix terrible ones
Even if a client is a borderline case for a loan, banks often lend them money, but protect themselves with even higher interest rates. Over a course of time, those rates will eat the client’s income and make up for the risk that the bank took when approving that loan.
Nevertheless, if the financial condition of that client improves, they should try to get a new, more reasonable borrowing, so as to fix the old one. In the words of the loan pros from the Australian Lending Centre, you have to keep moving towards less bad loans by covering the terrible ones. Although it’s a slow process, always think about the day when all of your loans will be paid.
Avoid easy-going attitude
When you know that your bad loan will serve a good purpose over a short period of time, you have to work as hard as you can to pay it within the set time limit. By approaching that problem in such a mature and responsible way, you’ll resolve your financial issues and move forwards.
Nevertheless, if you retain a relaxed lifestyle while the interest rates are piling up on your accounts, you could lose everything. Banks and other financial institutions impose high penalties on late payers. What’s more, such people aren’t able to get any kind of loan when their messy loan-paying habits are recorded in their official credit score.
As you can see from this piece, bad loans can come in handy as a temporary financial solution of a current personal or business affair. On the other hand, if bad loans become your habit, it will devour every single cent you earn and have a terrible effect on your life in general.
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