High-risk loans are so called because of the credit score of the borrower. The lender is the party at high risk of losing their investment in a borrower with a poor credit score—potentially unable to pay back their loan. You are probably wondering “why do it then if it is so risky?”
Well, unsecured loans afford the lender a big chance to raise the stakes of interest as high as they can, which is a good deal for most. In addition, erring borrowers don’t exactly get away with non-repayment of loans. Their credit score suffers a big decline and they stand the risks of getting blacklisted by financial bureaus.
What makes one a high-risk borrower?
Late Payment History:
Whether for personal bills or previously taken loans, a consistent pattern of late payments and repayments makes you a high-risk borrower.
High Credit Utilization Ratio:
This refers to the constant use-up of credit, up to your credit limits over some time.
Multiple Credit Application:
If at the time you are applying for a new loan, you have recent applied for a lot of credit, you are in the category of high-risk borrowers.
These factors combine to affect your credit score, dragging it down to 550 or less. If you happen to have poor credit, high risk, unsecured loans are your best bet; safe to say that such loans are made for you.
High-risk loans are generally easy to get, and there are many lenders to choose from, but it is imperative that potential borrowers read the terms of the loan contract thoroughly before getting into it. Some experts criticize high-risk loans as a financial cesspit that may prove difficult to get out of because of the cut-throat interest rates, but to avoid this; you should:
- Take only one high-risk loan at a time.
- Apply for small amounts at a time that you can pay back without unduly straining your finances.
- Choose a lender with the lowest interest rates that you can find. You can also join a credit union to have access to better interest rates and flexible repayment schedules.
- Make timely repayments.
- Know your credit score precisely and work hard to improve it.
- Use the high-risk loan taken to consolidate other small debts.
You can also avoid taking high-risk loans altogether by exploring alternative loan types, but these may prove harder to get, considering your credit score. High-risk loans are best taken after months of preparing in advance, rather than impromptu.