Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 14, 2012

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The economy has seen better days. Jobless rates remain high, most educated workers are underemployed, foreclosures seem to be the norm, and everyone has tightened their belts when it comes to spending.

This level of desperation hasn’t left a lot of room for good credit practices since maxing out credit cards, missing payments on mortgages or cars, and running up debt have become commonplace. Since people still need loans, whether they have good credit or not, bad credit personal loans may be one of the few—if not only—options remaining.

The Downsides

Bad credit personal loans are readily available to those with poor credit histories. Unfortunately, there is a necessary catch: these high risk personal loans carry higher than average interest rates. Prospective borrowers may cry foul but an examination of the risks associated with the industry can help educate borrowers about their lenders’ reasoning for assigning such high interest rates.

For better or worse, lending institutions are not charities. They operate to make a profit. In order to obtain profit they must charge interest on loans.

Personal financing—and more specifically bad credit personal loans—are not exempt.

While in a perfect world all borrowers would repay their loans, the fact is that many borrowers default. Oftentimes, those defaults come from borrowers have less-than-perfect credit history. Since a pock-marked credit history can be a clear sign of an unreliable borrower, lenders protect themselves by wielding high interest rates. High interest allays lenders’ risk while permitting borrowers—who probably had few borrowing options to begin with due to their bad credit—the chance to obtain funds they require.

As expected though, high interest financing can prove difficult to repay for already struggling borrowers since they needed to borrow funds in the first place.

Risky Necessities

That being said, bad credit personal loans are not a form of predatory lending. In fact, low credit personal loans are essential forms of borrowing for those with poor credit scores.

Borrowing money—even at interest rates that are difficult to repay—can be a necessary step for starting a business, paying off heavy expenses, or making sizable purchases. By forming new businesses using high risk financing, entrepreneurs are even able to contribute to America and bring much needed fuel to our economy. Paying off expenses—such as high medical bills—can free up disposable income that, if spent, could help combat the ongoing recession.

For many borrowers, the reward of paying down necessary expenses far outweighs the risk that high interest loans yield. Having less than pristine credit histories shouldn’t bar prospective borrowers from accessing the funds they need, especially when those funds are necessary steps to helping America stand tall and on her feet once again.

Alternatives and Second Chances

Borrowers who have bad credit and are intimidated by the prospect of borrowing high interest financing should remember that there are alternatives.

One of these alternatives is to seek aid from friends or family. Failing that, certain lenders may offer credit cards to borrowers with ailing credit. Using collateral can also help borrowers with bad credit secure personal loans at slightly lower rates.

Whether borrowers decide to borrow bad credit financing or alternatives, they must remember that borrowing a loan can be more than an opportunity to obtain funds. By repaying a loan, borrowers will build their credit and, in effect, heal any dings from past deficiencies. It’s entirely possible that a bad credit personal loan—when repaid in a timely manner—can actually raise a borrower’s credit score and ultimately lead to a new world of lower interest rates in the future.