What to know about high-risk loans

Many people turn to high-risk loans to help them get through a financial crisis — for example, if you have no other good options and need to pay your mortgage to avoid foreclosure.

High-risk loans typically come with multiple costs, including high interest rates and fees, and they sometimes require collateral. For these reasons, you should think carefully before getting this type of loan.

Read on to learn about the different types of high-risk loans, when they might make sense, and alternatives to consider.

• What are high-risk loans?
• What are the different types of high-risk loans?
• Where can you get high-risk loans?
• How much can you borrow with high-risk loans?
• What are the eligibility requirements for high-risk loans?
• How do you get a high-risk loan?
• Should you take out a high-risk loan?
• How can you avoid high-risk loans?
• What are alternatives to high-risk loans?

What are high-risk loans?

High-risk loans are ones in which the lender assumes there’s a strong chance the borrower could default on the loan. The lender takes on a higher risk to make these loans, and that often translates into terms that are less favorable for borrowers.

In some cases, these loans require collateral to secure the loan and mitigate the lender’s risk. Other times, high-risk loans are unsecured, leaving the risk to the lender, since borrowers with bad credit may be more likely to default than those with good credit.

Lenders may offer you a high interest rate and hefty fees to offset their perceived risk. If you fail to repay the loan in full, the sizable interest rate can help the lender recover some of its money.

Why do people take out high-risk loans?

People usually opt for high-risk loans for two reasons:

• To help them through a financial crisis — People turn to high-risk loans to help them cover regular expenses, including overdue rent or mortgage payments, utilities, and other bills.
• To cover an unexpected expense — High-risk loans can help those with limited credit options deal with unplanned expenses, such as car repairs or broken home appliances.

What are the different types of high-risk loans?

High-risk loans come in many forms, including:

• Bad credit personal loans — Bad credit loans are installment loans for consumers with a poor or limited credit history. These loans often have substantially high interest rates and fees.
• Bad credit consolidation loans — The purpose of these loans is to combine multiple debts, preferably with a low interest rate. But if you have a bad credit score, the interest rate on your consolidation loan might not be low enough to save you much money.
• Payday loans — These are high-cost loans with a short loan term — you typically must repay them in full within two weeks, or by your next paycheck. These loans have fees that equate to exorbitant annual percentage rates (APRs) of about 400%, according to the Consumer Financial Protection Bureau.
• Auto title loans — These loans are particularly risky because they use your vehicle as collateral. They also come with a jaw-dropping average monthly finance fee of 25%, equaling an annual percentage rate of roughly 300%, the Federal Trade Commission says.

Where can you get high-risk loans?

It’s usually good practice to build your credit score before applying for a loan or credit product. This improves your odds of approval for favorable interest rates and terms. But if time is a luxury you don’t have and you’re facing an urgent financial need, you may need to consider high-risk loan options. These types of lenders offer high-risk loans:

• Commercial banks — Many traditional banks offer HELOCs, but it may be challenging to get one if your credit is poor or limited.
• Credit unions — Credit unions may be more willing to work with you if you have bad credit, especially if you’re an existing member.
• Online lenders — Many online lenders provide personal loans for those with a fair or good credit rating. But you likely won’t receive the best rates as someone with good or excellent credit.
• Payday lenders — You should only turn to payday lenders as a last resort, due to the steep rates and fees on these short-term loans. While you can find payday lenders online, they also have brick-and-mortar locations where you can apply for a payday loan in person.
• Car title lenders — Like payday lenders, you should avoid car title lenders if at all possible. Remember, if you fail to repay the loan, the lender may be able to possess your vehicle.

How much can you borrow with high-risk loans?

The amount you can borrow with high-risk loans varies by lender.

With traditional banks, credit unions, and online lenders, personal loan amounts can range from $100 to $100,000. But the amount you can borrow for a high-risk loan will depend on many factors, including your credit score and the value of any collateral you’re required to offer.

Many states set loan limits on at least one type of high-risk loan — payday loans. A common limit for payday loans is $500, but loans can be for more or less than this amount.

Meanwhile, the typical loan amount for title loans can range from 25% to 50% of your car’s value.

What are the eligibility requirements for high-risk loans?

Some high-risk lenders may look at your credit score, while others rely on your income or collateral and don’t check your credit.

Here’s a closer look at some common eligibility factors:

• Credit score — Minimum credit scores vary by the banking institution or online lender. For example, Axos Bank has a minimum credit score of 700, while LendingPoint only requires a 580 score. Remember, though, other credit requirements may apply, and no credit score guarantees approval for a loan.
• Debt-to-income ratio (DTI) — Lenders will typically verify your income and review your debt-to-income ratio. Your DTI is a metric that compares your monthly debt payments against your total gross income. It’s an effective measurement lenders use to evaluate whether you’ll be able to repay your loan.
• Collateral — Payday loans and title loans usually don’t run credit checks because you secure them with an asset, namely a personal check (payday loan) or vehicle title (title loan).

How do you get a high-risk loan?

Follow these steps to get a high-risk loan:

1. Check your credit. Before you shop for a high-risk personal loan, look at your credit report to get an idea of where you stand. You can request a free copy of your report from the three main credit bureaus at AnnualCreditReport.com.
2. Look for lenders who work with high-risk borrowers. If your credit is less than ideal, direct your efforts toward personal loans for borrowers with bad credit. Shopping around and comparing multiple lenders can help to ensure you get the best interest rate and terms for your financial situation.
3. Apply for the loan. Some lenders may approve your application and provide your funds the same or next business day after you apply.
4. Add a cosigner, if necessary. Including a cosigner with strong credit on your loan application could improve your odds of getting approved and snagging a lower rate. But only add a cosigner if you’re reasonably sure you can make your monthly payments on time, as a missed payment could damage your cosigner’s credit.

Should you take out a high-risk loan?

Getting a high-risk loan may make sense for you if you only need a small amount of money and you’re confident you can repay it quickly. These loans can be especially helpful if you need money fast. For example, the funding time frame for personal loans can range from the same business day to several business days.

Depending on your financial situation, it might be worthwhile to pursue a high-risk debt consolidation loan. Consolidating multiple debt accounts into one could make it easier to manage your finances and keep track of your payment due date. Making regular on-time payments makes up 35% of your FICO Score.

But keep in mind that you should only take out a payday or car title loan when you’ve exhausted all other lending options.

How can you avoid high-risk loans?

The best way to steer clear of high-risk loans is to prepare for unexpected expenses and tough financial times before they happen:

• Build an emergency fund. Creating and growing an emergency fund is an effective way to safeguard yourself against financial distress. Start with a small goal, say $100, and regularly contribute to your account, no matter how small your deposits are. Soon you’ll have a fund that’ll help you deal with financial emergencies without needing to get a loan or run up credit card charges.
• Boost your credit. Improving your credit health could lead to better financial options when a financial disaster strikes. Start by reviewing your credit reports for incorrect and fraudulent information, and dispute any errors with the three major credit-reporting agencies — Equifax, Experian, and TransUnion. Making consistent on-time payments and paying down your balances can also have a positive effect on your credit.
• Follow a budget. Review your bank and credit statements to identify spending you can trim. Reducing your expenses and following a budget may prevent you from taking out a high-risk loan in the future.
• Earn extra cash. If there’s little room in your budget to cut back on expenses, consider asking your employer for a raise, taking a part-time job, or starting a side hustle.

What are alternatives to high-risk loans?

Fortunately, you have other options to access or free up cash for an emergency. Consider these better alternatives:

• Negotiate with creditors for more time. Check with your creditors to see if you can get an extension on your payments. You may have to pay a fee or higher interest rate, but it could be less costly than a high-risk loan.
• Ask your employer for a paycheck advance. Some employers are willing to pay you ahead of schedule for work you haven’t been paid for yet. Any amount you receive will typically be deducted from your next paycheck.
• Get help through credit counseling. Nonprofit agencies can partner you with a certified credit counselor to create a workable plan to resolve your financial problems and get your finances on solid ground.
• Borrow from a close friend or family member. Asking someone close to you for a loan could prevent you from paying exorbitant interest rates and fees. It’s wise to construct a loan agreement that details a repayment term and parameters you agree upon. Make sure you uphold your end of the bargain to avoid putting strain on your relationship.