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Loans and risks- Finding your way through the obstacle course

When taking out a loan, people are often confronted with a real obstacle course of things they don’t understand. Figuring out the risks can be difficult. Even something as simple and straightforward as fast loans can turn into a maze of indecision. Taking out a loan and getting a clear picture of the risks isn’t actually that difficult, but you need to understand the issues.

Loans and risks, basics

The major problem for borrowers is assessing risk accurately. All borrowers are aware of possible problems, but most don’t know where to start looking for hard facts to help them make decisions.

We need to start with some basic facts, to make sure everything’s clear:

• You’re not just borrowing the amount you borrow- You’re also responsible for the interest, loan charges, and accumulated amounts owing.
• Defaults on repayments always cost extra money. Your repayment amount goes up if you miss a payment.
• Terms of repayment are legally binding. You are legally obliged to make repayments as specified by the loan agreement.

These situations apply to cash loans and any other form of borrowing. The risks are based on the amounts of money involved.

Where most people get confused is in assessing the amount of risk. A $300 loan doesn’t sound like a lot of money, but if you miss a few payments you could easily be looking at an extra $100 on that loan, or 30% interest. That’s double the average credit card rate. Make that a $10,000 loan, and you could be looking at a budget with real problems, particularly if you’ve got other bills.

Managing your risk

One of the sad facts of borrowing is that people often simply don’t listen to their lenders. Lenders are in business to make money. They don’t want to be chasing payments. They want an efficient cash flow.

All lenders will advise borrowers of multiple payment options. Unfortunately, the borrowers who don’t listen are also the borrowers who don’t understand the risks. Some people assume they’re being given the more expensive option, when in fact it’s the safer option, even though it costs a bit more.

For example:

• A borrower needs $1000.
• The lender suggests repayments of $25 a week.
• The borrower decides the lender is just trying to make more money out of the loan, and insists on a $100 weekly repayment.
• Bills come in, and the borrower defaults in the first two months of the loan.
• By a strange coincidence, the extra $600 the borrower would have had available on the cheaper repayment would have covered all the bills.

This happens so often it’s almost predictable. It’s also dangerous, because the borrower in this case will have a lot more self-inflicted problems to manage.

Borrowers can be their own worst enemies. There really is an unyielding bottom line for debt- Make sure you don’t get yourself into situations where the risks of borrowing are dangerous.

The cure is realism. Debts can be paid off on low repayments with regular amounts, and often you can pay off a bit more, when you can afford it. There’s no need to get into trouble at all.

Play safe, and your borrowing will be safe.

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