High Risk Personal Loans

The most sought after loans are those with low interest rates and favorable terms, but only individuals with exceptional credit scores can get these loans. On the other side of the lending spectrum are high risk personal loans. Everyone knows these loan options exist for individuals with a poor credit rating, but few people know exactly why lenders consider them high risk.

Risk Factors for Lenders

Whether your lender grants you a $3,000 unsecured loan, a $25,000 auto loan or a $250,000 mortgage, they take a risk you will not repay your debt to them. You may think that there is less risk involved with the auto loan or mortgage because of the collateral, but this isn’t always the case. Sometimes, lenders wind up with vehicles or homes they are unable to sell for enough to recover the cost of the loan. Depending on the model of car or your housing market, lenders can take substantial losses after repossession or foreclosure.

In general, your credit history is the primary tool your lender uses to determine your default risk. Do you have collections and charge-offs? Do multiple creditors report slow pays? Although this alone does not prove a lack of trustworthiness on your part, it does give your lender reason for pause. If there were extenuating circumstances to cause your credit blemishes, you may not fall into the category of high risk personal loans.

Your income source is another area of concern for some lenders. Self-employed individuals in seasonal professions are riskier to loan money to than salaried employees at established companies. This is also true of commission-only workers. It isn’t that any one line of work is better than the next; it’s that fluctuating incomes are unstable. Any uncertainty about your ability to repay your loan during your lean times of year can classify you as a high risk borrower.

Taking High Risk Loans

Receiving high risk personal loans is not the financial kiss of death, just higher interest rates and fees. In fact, taking a high risk loan can be the first step to returning to favorable credit status. As long as you make your payments on time and work to correct any existing credit issues you can fix, you can restore your good credit rating and potentially refinance your high risk loan in the future.

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