How to Know a Loan is Too Risky

December 15, 2022

Short on cash? If you are like millions of people around the country, you may be considering different ways to borrow money to cover your financial needs. You also probably know that doing so can have potential downsides. In the finance world, when someone takes out a loan, the riskiness of that loan is always a primary concern.

Borrowing money should not be taken lightly. After all, you’re going to have to pay that money back with interest. So how do you know when you’re taking on too much risk with a loan? There are several factors to watch out for – and it’s smart to consider them all before borrowing money that you will eventually have to pay back.

Common Types of Loans that Average People Use

There are multiple ways to judge how risky a loan is – just like there are multiple types of loans. Common types of loans you may be considering that are accessible to average people, according to LendEDU, include:

  1. Personal loan
  2. Borrowing from a friend or relative
  3. Cash Advance on your credit card
  4. Retirement loan
  5. Pawnshop loan
  6. Payday loan
  7. Home equity loan

A glance at this list might automatically eliminate some of the options. For instance, if you don’t own a home (and aren’t planning to) then a home equity loan is out the window, so to speak. Some people will initially ask a family member or generous friend. Others would rather try anything else before going to a loved one. Needless to say, even a quick dive into the different types of loans will limit your options as the reality and criteria of going through the process become more clear.

Signs a Loan Might Be Risky for You

In short, there are many factors to consider when taking out a loan, and it can be difficult to determine whether or not a loan is too risky. However, there are some red flags that can indicate that a loan may be too costly or dangerous to pay back. A loan that is too risky is one that the borrower is likely to default on. For instance, if the borrower has a history of defaulting on loans, or if the borrower is currently in financial trouble, the loan may be too risky.

There are other indicators that can tell you whether or not a loan is too risky:

  • If you don’t have a good credit score, you may be taking on more risk than someone with a high score.
  • If the interest rate is too high, that’s a good sign that the loan is risky.
  • The lender seems unscrupulous, untrustworthy or even dangerous.
  • You are being pressured into accepting terms you’re not comfortable with.
  • The potential loss – in funds, assets such as a car or home, or relationship with a well-meaning person in your life – isn’t worth it.
  • The benefits are unclear or may not be worth the tradeoff.

The first step is to compare the loan to similar loans that have been made in the past. This will give you an idea of what kind of risk is typical for this type of loan. If you are a business owner, identify specific risks that might impact your company.

Most important: Take your time when making an important financial decision! Do your own research and speak to an expert if necessary. Ask as many questions as you can to get a full picture of the pros and cons. As a rule, the bigger and riskier the loan, the more consideration that should go into making the decision.

Use Trustworthy Financial Services at Chicago’s South Suburban SSCE

The benefits of being careful with your hard-earned dollars cannot be understated. Even if a loan is not in your near future, a neighborhood financial service provider like Chicago’s South Suburban Community Exchanges (SSCEs) will do other things for you, like help you pay bills on time, take care of transportation needs, and stay on top of your finances. And you can accomplish these goals under one roof, from check cashing to getting a prepaid debit card to taking care of your auto title and registration.

We’re here to serve you and help you achieve your financial dreams with an array of services. Find your nearest location or check out our other services online to find out what else we can do for you.

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