High-risk loans are generally for borrowers who have a limited or bad credit history. Since lenders view these types of borrowers as more of a risk, high-risk loans often come with higher interest rates than traditional loans.
Because of these high costs, it’s important to understand how these loans work before getting one.
A high-risk loan is a type of loan that’s easier to qualify for. However, many high-risk loans are considered a predatory form of lending.
High-risk lenders approve borrowers with low credit scores and poor credit histories. While this may sound like a good thing, high-risk loans typically have incredibly high interest rates and expensive fees to mitigate the risk for the lender. You’ll likely also have a short repayment term for the loan, which can make it difficult to pay off.
Many high-risk loans are unsecured (no collateral required). But some loans may require you to put up collateral, such as your car’s title. In this situation, the loan becomes an even higher risk for you — if you default on your loan, the lender can recoup its losses by seizing your collateral.
High-risk loans come in many forms, including:
A payday loan is a short-term loan that allows you to borrow a small amount of money (usually $500 or less) that you must repay when your next payday arrives. This means your repayment term is typically only two weeks. In addition to short repayment terms, payday lenders charge sky-high annual percentage rates (APRs), which is your interest rate plus any fees. You may have an APR of nearly 400%, thanks to the costly fees associated with borrowing the money.
Lenders often require borrowers to write a postdated check for the loan balance (and any fees), or allow the lender to debit the funds from a bank account. If you can’t pay back the loan in time, you may be able to extend the due date, but you typically must pay an additional fee each time you do so.
An auto title loan uses your vehicle as collateral to secure loan funding — typically a percentage of your car’s value. You provide the lender with the title to your vehicle, and if you can’t repay your loan, you lose your car.
As with payday loans, APRs are high — they can go up to 300%. They’re also short-term loans, with repayment terms ranging from 15 to 30 days. Car title loans often have costly fees for things like processing and loan origination.
You may be able to qualify for a traditional personal loan that’s specifically geared toward borrowers with bad credit. With a personal loan, you receive a lump sum of money upfront and repay the loan in fixed monthly installments, with interest. You may be able to get a debt consolidation loan to pay off multiple existing debts.
However, bad credit personal loans usually come with high interest rates. You may also have to pay an origination fee for your loan application to be processed, which can be as high as 10% of your loan amount.
In most cases, a high-risk borrower is someone whom lenders view as likely to default on a loan. Lenders look at several factors to determine if you’re a high-risk borrower, including:
In some cases, a high-risk may be the right choice. But remember to proceed with caution when it comes to payday loans and car title loans.
It may make sense to get a high-risk loan if:
High-risk loans aren’t the best financial products out there, and it’s best to avoid them if you can.
Here are some reasons to steer clear of high-risk loans:
The good news is there are other ways to get access to cash or get some relief for your financial situation. Some alternatives to high-risk loans include: