What is your credit score? Do you have a credit score?
If you don’t have a score, or your credit is not good, you will be risky to lend money to. In short, this means that any loan you obtain will be higher risk. With this added risk comes additional protections for the party lending you money, namely:
- A high rate of return;
- A potentially expedited payback period;
- Additional legal clauses.
If you are subprime (i.e. a person with bad credit) you can still borrow money. But your debt is considered high risk, or unsecured.
“High-risk loans” are loans that pose a higher risk to a lender who decides to issue credit to someone considered a “high-risk borrower” with a poor credit score.
The low credit score of the creditor is the outcome of a pattern of making late payments, keeping credit card balances close to their caps, or applying for a lot of credit recently or possessing a small credit history.
‘A high-risk loan is a subprime loan that, according to their credit report, is given to those with a blemished credit background,’ says Thomas Nitzsche, Clearpoint Credit Counseling’s public relations manager. High-risk loans may have double- or even triple-digit interest rates, according to Nitzsche.
How lenders mitigate the risk of making loans to individuals with poor credit is high interest rates. When you don’t repay the debt, at least the interest paid on the loan makes up for or lowers the loss of the lenders.
Most high-risk unsecured personal loans are affordable and easy to receive online. But if you have a bad reputation and are seeking a loan, read the terms and documentation carefully so that you know what you are walking into.
What Is a High-Risk Loan?
Compared to other, more traditional loans, a high-risk loan is a lending or credit product which is deemed more likely to default. When assessing a loan offer, the greater probability of default may be due to one or more reasons.
Here are the factors that are used to assess risk. Remember, the higher the perception of risk (i.e. not paying the loan back) the greater the need for a higher interest rate to compensate the lender for providing the loan.
What makes someone risky? What makes a loan risky?
- Income and payment ability: Lenders equate the annual income of a creditor to the amount of money sought. Income authentication can include tax returns and current paycheck stubs. If you don’t have proof of income, you are risky.
- Past payments history: The financial history of the creditor shows when their loans are due on time. Those with high credit scores are deemed to be less volatile than those without a decent credit score. If you can’t prove that you have paid your bills on time and regularly, you are a higher risk.
- Security: As leverage, any physical assets that the creditor may bring up can support their application. For instance, if an auto is used as collateral and the creditor fails to pay back the debt, the car will be repossessed by the lender. If you don’t have any assets, you are riskier to lend to.
- Co-signer: By promising to pay back the debt if the creditor wants to do so, a co-signer with a higher credit record will help the lender. If you don’t have a cosigner, you are a riskier person to lend to.
- No Income Verification Loans. The No Income Verification (NIV) or No Paperwork loans are classified as high-risk loans made without checking the applicant’s income. These higher-risk loans can also take the form of unsecured loans (made without the borrower’s collateral) or secured loans issued without the borrower’s currency. To offset any possible losses, lenders specializing in such high-risk loans can charge higher fees and interest rates.