Guide to High Risk Loans

A high risk personal loan is used when a borrower has bad credit, a short credit history, or no collateral. It’s called a high risk loan because the lender is at a high risk not have his money repaid, or at least have it repaid late. Because of this, the lender agrees to finance the loan for the borrower, but gives the loan higher interest rates than it would have if the person had collateral or a better credit score.

While the fact that the borrower has to pay a premium on the money they borrow is bad for the borrower, when used right high risk loans can actually have a lot of benefits. It can be used to repair bad credit by making payments on time and repaying the loan balance in full. Depending on how long the term of the loan is, by making payments on time and building a credit history, the borrower may eventually be able to refinance the high-risk loan at a lower rate

Types of High Risk Loans

There are essentially two types of high risk loans (and any other loans for that matter), secured loans and unsecured loans. Bad credit secured loans require you back the loan with some form of collateral, usually a house or a car, but jewelry and collectables may sometimes also be used. This allows the lender to seize the assets used as collateral in the event that a person is unable to repay their loan. High risk unsecured loans don’t have any collateral to back them.

Secured loans are less risky for lenders because they can usually recoup some money though the sale of the collateral assets in the event that the borrower doesn’t pay them back. This makes these loans much easier to obtain, particularly for someone with bad credit, and a lower APR. Unsecured loans are given out based on your ability to repay the loan. Therefore, these loans are difficult, if not impossible to obtain, for someone with no credit or bad credit history. If you do obtain them, they have extremely high interest rates. Despite all of the different hurdles that you need to overcome, there are two high risk loans that will most likely always be available to people with bad credit.

Logbook (Car Title) Loan

Logbook loans are a secured, high risk auto loan taken that uses your car or truck as collateral. The amount that you are able to borrow depends on the make and model of the car you drive. Obviously someone that drives a new BMW will be able to borrow more than someone who drives a 1991 Geo Metro because the BMW will be worth more.

This type of loan generally doesn’t require any credit checks and the acceptance rate is close to 100%. The only requirement is that the car is free of any outstanding debt. These are good options for people who do have a car to borrow against because the interest rate will generally be lower than with unsecured loans and you can borrow more money. However, you will pay more in interest on these loans than you would if you could take out a loan on more durable goods, such as a house or property. All that is required of you is to sign a paper signing the title of the car over to the company should you fall behind on payments. So make sure you don’t fall behind on your payments, otherwise you may end up relying on the bus to get to work.

Payday loans, also known as cash advances, can be useful to people who are in a bind with no assets, but are extremely expensive in terms of interest rates. They are short term loans, usually only for a few hundred dollars, that are given for a short amount of time, two weeks at the most. To qualify for a payday loan you need to be 18 years old, have a steady job, usually proven by a pay stub, a checking account, and an established residence. There’s no credit checks involved with these loans either and approval usually only takes a few minutes to a few hours and you can have your money that day, or at the latest the next day. The loan amount and fees involved are then paid on your next payday. No collateral or co-signer is required

These loans are a good option if you need money right now and can’t wait for it due to some kind of emergency situation, but don’t make a habit out of using payday loans. The fees on them are usually $10 to $20 per $100 borrowed. This may not seem like much, but the interest rates work out to over 300% yearly. If you’re on a tight budget you especially need to be careful because you may end up in a situation where you have to roll the loan over into the next week. Most payday companies will gladly do this for you, so long as you pay the fees involved each week. Even if you only roll the loan over four times with $20 in fees each week, by the fourth week you’ve spent just as much in interest as you owe in principle (assuming you took out $100).

Think long and hard before taking out a payday loan.

Just because you have bad credit doesn’t mean you can’t qualify for a high-risk loan.  Even those of us with the worst credit do qualify for certain loans.  However, the goal of having a high risk loan should be to establish yourself with good credit so that in the future you can take out other loans or refinance your current loan at lower interest rates.