A high-risk personal loan can be a source of funding for people who have a low credit score or no credit history and need to access cash. It is considered “high-risk” because the borrower is seen as more likely to default on the loan. For this reason, the interest rate is likely to be significantly higher than what a borrower with a more creditworthy profile would be offered via a conventional personal loan.
Here, learn the details of high-risk personal loans, their pros and cons, and alternatives if you need a quick infusion of cash.
What Are High-Risk Personal Loans?
High-risk personal loans make cash available to those with a poor credit score or without a credit history. Some points to consider:
• Most personal loans require a credit score of 580 or higher, but if you have a low credit score (typically between 300 and 579) or lack a robust credit history, you may be able to tap into a high-risk personal loan.
• These loans can give you access to cash, but they often come with higher interest rates, higher fees, strict repayment terms, and limits on the amount of money you can borrow.
• While some of these are unsecured personal loans, others may be secured. This means you may be required to put up collateral, or an asset, to be approved for the loan. In this situation, if you default on the loan, the lender can seize your asset.
• Personal loans typically come with fixed interest rates, and you must repay them in fixed monthly installments over a specified period, usually up to seven years. High-risk personal loans may have much shorter terms, however.
It’s worth noting that personal loans don’t usually have any restrictions on their usage. You could use them to pay for a car repair, travel, credit card debt, a new kitchen appliance, and almost any other legal purchase or service.
Recommended: Personal Loan Glossary
Types of High-Risk Loans
Here are some options you might consider for high-risk personal loans.
High-Risk Unsecured Loan
With this loan, you will not need to put up collateral to obtain funding. Typically, the lender will offer you a lump sum of cash; perhaps up to $10,000. While this may supply a quick cash infusion, keep in mind that the “high risk” cuts both ways. The lender is taking a gamble on you, as the odds of you defaulting may be high. But you are also probably securing a loan at a high interest rate and with significant fees and limitations.
High-Risk Secured Loan
In the case of a high-risk secured loan, you will be required to put up a form of collateral (such as real estate or a savings account) to gain access to funding. If a lender offers you this kind of loan, keep in mind that if you default, you could lose your collateral.
Payday Loan
Payday loans are short-term, high-cost loans, usually due on your next payday. Typically they provide a small amount of money, such as $500, that needs to be repaid within two to four weeks, and are offered online or at retail locations of payday lenders.
Here’s how they often work: You write a post-dated check for the amount borrowed plus fees, and the lender debits the funds from your account on the day the loan is due. Or you might grant the lender permission to pull the funds from your bank account electronically. If you can’t pay off the loan on time, it could roll over with more interest and fees accruing.
Note that these loans can involve an annual percentage rate (APR) of up to an eye-watering 400%. For this reason, they are considered a last resort.
Car Title Loan
Not all states offer them, but a car title loan lender lets you borrow between 25% to 50% of your car’s value, typically starting at $100 with 15- to 30-day repayment periods. In exchange, you put your car up for collateral. This means the lender can take possession of your car if you don’t repay the loan. (In one review, the Consumer Financial Protection Bureau found that one in five borrowers of this kind of funding winds up losing their vehicle.)
Lenders who offer car title loans typically have very low or no credit requirements, and you can get funding fairly quickly, even in a day. They also likely come with extremely steep interest rates, up to 300% APR.
Pawn Shop Loan
With a pawn shop loan, you hand over an item as collateral (such as jewelry, a musical instrument, or a computer), and the pawn shop offers a loan based on the item’s appraised value.
The shop may lend 25% to 60% of the resale value of the item, but note that if you fail to repay the loan, the pawn shop can keep and then sell the item. The pawn shop may give you 30 to 60 days to repay the loan.
Here’s the risky part: The APRs are high, around 200%, and vary based on your state.
Recommended: Using a Personal Loan to Pay Off Credit Card Debt
Figuring Out if You’re a High-Risk Borrower
Here are signs that you would be considered a high-risk borrower by lenders:
• You have a non-existent or thin credit history, meaning you don’t have a proven record of handling debt responsibly
• You have a low credit score (generally, below 580)
• You have made repeated late payments on loans or credit cards
• You have defaulted on a loan in the past
• You have a high debt-to-income ratio (DTI); typically, this means your debts add up to more than 35% of your income
• You are unemployed
• You have declared bankruptcy in the past seven to 10 years
Each lender will have its own guidelines regarding to whom they lend, how much, and at what rate and fees. It’s therefore important to check with your lender about the requirements for their personal loans and their terms.
Why Choose a High-Risk Loan?
If you have poor credit or no credit and want to borrow money, a high-risk loan may offer you the best (or only) option to access a loan, particularly if you have an urgent need for cash. You can often access high-risk loans with a lower credit score or minimal credit history than you would need to qualify for traditional loans.
You might seek this kind of loan vs. dipping into an emergency fund you just started or into a college or retirement fund. It could help you preserve those assets if, say, you need quick cash for a move.
It’s important to consider both the pros and the cons of these personal loans so you make the right choice about whether to pursue this type of funding.
Disadvantages to High-Risk Loans
High-risk loans come with several downsides, including the following:
• Higher interest rates and fees: High-risk loans typically have higher APRs and fees, meaning that you’ll pay more over the loan term. An example: Some have a 400% APR vs. the average APR of 12.38% for conventional personal loans as of August 2024. Some people can get caught in a debt cycle of taking out high-risk loans continually (particularly in the case of payday loans).
• Risking collateral: You may have to put up an asset as collateral for your loan. If you fall behind on payments, you may lose the asset because your lender will seize it.
• Lower amounts: You may not get to borrow as much as you prefer, because many lenders will only pay out small amounts to high-risk borrowers. For instance, some payday loans max out at $500.
How to Qualify for a High-Risk Personal Loan
Here’s how you might qualify for a personal loan as a high-risk borrower. Personal loan lenders will want you to see that you’ll likely be able to cover a new loan payment. Among other factors, lenders may use your credit score, your income, and your DTI to assess your ability to repay a loan. In terms of a target DTI, lenders like to see you keep it below 35% for a standard personal loan. With a high-risk loan, you may qualify with a significantly higher figure.
Next, you’ll gather the documents, including:
• Your ID
• Social Security number
• Pay stubs
• W-2 forms
• Federal income tax forms
• Bank account statements
You can apply online for a high-risk personal loan in just a few minutes once you have your materials ready. Your lender will let you know if you need to submit more documentation. In most cases, you’ll have a loan decision fairly quickly (some lenders advertise approval in minutes). If approved, you’ll likely have funds within one to three business days.
Alternatives to High-Risk Loans
You can also consider alternatives to high-risk loans, including:
• Payday alternative loans: Credit unions may offer their members short-term loans as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. PALs 1 offer between $200 and $1,000 with a maximum APR of 28%, and one- to six-month repayment terms. PALs II offer up to $2,000, a maximum 28% APR, and one- to 12-month repayment terms.
• Family or friend loan: Family members or friends may be willing to lend you money. However, ensure that you can repay the loan in a timely manner so you don’t risk damaging the relationship.
• Get a cosigner: You can approach someone you know who has good credit to become a cosigner on your application to help you qualify for a standard personal loan. Make sure, however, that both parties involved understand that the cosigner is responsible for taking over your monthly payments if you default on repaying the loan. That’s a major commitment on your cosigner’s behalf.
• Look for “buy now, pay later” offers: These allow you to purchase an item and then pay it off on an installment plan, which may or may not charge interest.
• Build your credit: Perhaps it seems obvious, but building your credit can play a key role in helping you qualify for more favorable loans in the future. You might work on positively impacting the factors that determine your credit score or meet with a qualified credit counselor to learn strategies.
Recommended: Guide to Personal Loans
The Takeaway
High-risk personal loans can be a source of quick cash for people with a low credit score or a thin credit history. They can be risky for the lender, because there is a fair chance the borrower might default. They can also be risky for the person seeking the money because the interest rate, fees, and other terms may prove very expensive and/or involve potentially losing any collateral that might be put up.
If you are a high-risk borrower, it’s important to fully understand what these loans involve and the downsides if you cannot repay them on time. It may also be wise to review what options exist before you decide to apply for a high-risk personal loan.
If you’re seeking a standard personal loan, see what SoFi offers.
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FAQ
What is considered a high-risk loan?
High-risk loans are funds offered to individuals who may have bad or no credit. In exchange for accepting a higher-risk applicant, lenders typically charge higher APRs and fees and/or may require the borrower to put up collateral.
What type of bank offers high-risk loans?
Banks typically don’t offer loans to high-risk borrowers, though it may be worth checking with them before moving on to another type of lender. Those who do offer high-risk personal loans could be online lenders or a retail payday loan provider, for example.
What two types of loan should you avoid?
There are several types of loans you may want to avoid if possible, including car title loans and payday loans. Why? You will pay high interest rates which can trap you in a cycle of debt. Also, with a car title loan, you are using an asset as collateral, which means you risk losing your vehicle if you can’t repay the loan on time.
Photo credit: iStock/Eleganza
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