When the borrower defaults on their loan payments for many months in a row, the lender (which is usually a sub-prime lender) will assume that they will not collect on their advance and henceforth report the monies as bad debt.

I certain estimated amount of bad debt due to Charge-offs is reported by  lending companies to their lenders. Financial institutions always allow for a percentage of Charge-offs in their yearly reports.

Of course, if a sub-prime borrower takes a high risk personal loan – such as a Payday Loan – and is completely delinquent at some point, their credit rating will be severely damaged due to their delinquency reported back to the credit reporting agencies such as Transunion, Equifax, Experian, Fair Isaac, and Teletrack.

Creditors track all of the borrowers that default on loans – so badly that their loan is put in the Charge-off category by the lender. They also track whether or not a Charge-off is ultimately paid off at a later date.

You don’t hear the term Charge-off much in everyday consumer lending because it is more of an industry term.

In this graph we can see the average Charge-off percentage rates from the turn of the century until the beginning of 2009. Take notice of the steep fluctuations in Charge-offs between mid-2006 and late 2008, due to sub-prime mortgage backed securities disaster of the time.

A tip to borrowers who may be deliquent on their loans for a period of over three months – don’t think for a second that if your loan is thrown into the Charge-off category that there is no difference in the damage to your credit rating whether you pay back the loan or not. It makes a HUGE difference if you pay back all that you owe later down the road. It’s all tracked.

Living in California and you need a high risk personal loan? There is only one reason why a bank considers a loan high risk and that is when the borrower does not have any security or collateral to secure the loan. Better known as an unsecured loan.

Throughout California there several lenders who approve high-risk borrowers but at a price – meaning the Interest rate is higher than any other typical loan with the borrower having a FICO score of 680-720 or higher. To be approved by a bank for an unsecured loan is not a problem usually if you have the higher credit score, you have a steady job, and some collateral assets, but if you are considered a high risk borrow by the bank (or loan officer) you will likely “have a problem”. The problem can be put in numbers such as an APR (annual interest rate) between 10% and 15%. It can get worse too where the high risk borrower is paying an APR of 25%  – 28% which is credit card level, and depending on what area of California you live in, teetering at the brink of a “loan shark” rate.

When you are dealing with high risk lenders you are at risk as well. Why? Because you may run into lenders who are predatory and take advantage of applicants who are desperate for a loan, and sometimes in need of emergency funds. Not a pretty picture I’m painting here I know, but you need to get a clear picture.

Odds are that if you are in the unfortunate situation of needing an unsecured loan and you don’t have a cosigner or some form of collateral like a vehicle to use for a car title loan, you won’t be applying at major banks for long. The conventional banks will turn you down and you will be applying with unconventional lenders who make their money lending to high risk borrowers as described above.

This is where you need to be careful. Try to avoid lenders who are payday style lenders that can end up charging you over 350% APR. I’m sure you have heard of these nightmare APRs through the media or through friends or family. I hear about these kinds of stupid high interest rates being charged all over California. I’ve seen this in Los Angeles, Long Beach, San Diego, Long Beach, and up North in San Fransico, Sacramento, Redding, Santa Rosa, Fresno, and Santa Cruz. No place in California is immune from predatory lending. Enough said on the precautions you need to take – I’m sure you get the point. Onward.

High Risk for All Involved

It is no wonder that American currency has the words “In God We Trust” written or engraved in it. Banking and finance has always been about trust. When the borrower borrows money the lender trusts the borrower will pay bank the money on time and with Interest (fees as well). This is what make the world go around – without credit and financing all sectors of our society would cease to expand and grow. When trust between the borrower and the lender is compromised all parties are at risk. Ironically many people think that it’s just the lender who is at risk in an unsecured loan agreement, but the borrower has his or her credit rating to lose as well, and take it from someone who has lived for 7 years without any credit rating at all (bankrupt), it’s no fun. Yeah – literally no fun because you can’t use credit for anything – what you make from your job is it.

What a High Risk Unsecured Loan Adds Up To

Now that we have the preliminarily data covered let us get down to the nitty gritty of the math. For this let us do simple scenario where the borrower gets approved for a high risk unsecured loan at an APR of 15% for a term of 3 years. The principal amount of the loan was $10,000 and the fees we’ll put aside for this calculation.

We can use a simple loan calculator for this and we just happen to have one a few inches over from where you are reading this on the screen. Enter in the $10,000 as the loan amount with no symbols or commas please. So 10000 in the loan amount field. Now enter the interest rate (15% APR) as 15, the length of the loan term in years 3, and the frequency of payments – the number of days between payments 30.

Click the submit button and the loan calculation is done. Shown below are the results. The borrower gets off pretty well here considering they are in the high risk category and and they didn’t have any collateral or security whatsoever.

Total Amount to be payed: $12312.07
Total amount of interest $2312.07
Payments: $337.32

We’re at a total of $2312.07 interest for the unsecured loan over a 3 year period, and as long as the borrower used the money to leverage something profitable all can be well. If the borrower lives up to the fears of the lender, and defaults on the loan through a long process of deliquency, including all of the hassles with loan collection angencies etc., then the borrowers credit rating will plummet even further, and they will be out of contention for any kind of loan in the near future.

In God We Trust