High-Risk Loans 101: Definition, Types, and Benefits

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High-risk loans are generally not the first option that comes into a borrower’s mind when they think about borrowing money. But sometimes, borrowers turn to high-risk loans, particularly if their credit score is far from perfect. For example, you may need to look for the best personal loans for bad credit.

Lenders examine a potential borrower’s credit score before approving any loan, and if you don’t have a good credit score, your only option may be to take these loans that are considered high-risk.

What Loans Are Considered High-Risk?

High-risk loans are essentially those that are risky for lenders because there is a higher chance that borrowers will default. To mitigate that risk, lenders charge high interest rates or require collateral. On the contrary, if the loan is unsecured, the risk is heavily placed on the lender. Here are the loans that are considered high-risk:

  • Secured loans: These are the loans that require borrowers to put up collateral, which lenders can get if you default on the loan. A car title loan will require you to put up the title of your car as collateral. If you get a home equity line of credit, you could lose your home if you fail to make payments.
  • Payday loans: This is a short-term loan that you must pay upon your next payday. It doesn’t require borrowers to put up any collateral, but it does have insanely high double-digit interest rates to offset the costs on the lender if a borrower defaults.
  • Bad credit personal loans: If you’re a borrower with a low credit score, you might find it hard to get a conventional loan. In this case, you can turn to personal loans provided by some lenders for borrowers with bad credit. However, these loans come with penalties, high interest rates, late fees, and strict repayment terms.
  • Title loans: This high-risk loan requires you to turn over your car title as collateral. The amount you can borrow is often dependent on the value of your vehicle, and you’ll typically have 30 days to repay it. If you can’t repay it, the lender may require you to surrender your vehicle to them.

Benefits of High-Risk Loans

Although we’ve painted a pretty bad picture for high-risk loans thus far, they have some benefits. Some of these include:

It provides an option for borrowers with bad credit.

If you don’t have a good credit score, you might not be able to get approved for a conventional loan, or you may get high interest rates. In this case, high-risk loans can provide you with the funding you need, whether for an emergency or a large purchase.

You can use it to improve your credit score.

As long as you make timely payments and don’t default on a high-risk loan, it will eventually positively impact your credit score. This is one way you can fix your credit score so that you can qualify for conventional loans in the future. However, on the contrary, if you don’t pay high-risk loans on time, they can damage your credit score even more.

It helps cover unexpected expenses.

Those who don’t have an emergency fund particularly need this assistance. A high-risk loan can help you cover unexpected costs for medical emergencies or job loss, especially since lenders of this loan category disburse funds fairly quickly. Just be sure to pay the loan on time so you don’t end up in more debt.

It helps protect your stocks and assets.

Instead of borrowing against your retirement account or other long-term assets, a high-risk loan can be the last option when you need money fast. That way, your financial future is still secured. You can even find a high-risk loan that doesn’t require you to put up collateral.

Conclusion

Now that you know what a high-risk loan is, as well as its types and benefits, you can make a solid decision if this is the right type of loan for your needs. Just do some preliminary research so you can find the best deal possible. Once you get out of debt, your priority should then be to improve your credit score so you can opt for traditional loans with low interest rates the next time you need financial assistance.

Author’s Bio:

John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.