A Guide to High-Risk Loans

Getting a loan when you have bad credit can be challenging, but it’s not necessarily impossible. High-risk loans can provide a path for bad-credit borrowers to access the funds they need. But there are also risks to consider, including higher interest rates and fees.

Try to prequalify for a traditional personal loan before taking out a costly, high-risk loan such as a payday loan, title loan, or pawnshop loan.

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What are high-risk loans?

In exchange for accepting an applicant who may have bad or no credit, a lender may charge a higher APR, require collateral, or both. So high-risk loans generally cost more, as they shift some of the risk to the borrower. 

Types of high-risk loans

High-risk loans can come in several forms, but many share a set of common characteristics. A combination of high interest, large fees, and short repayment times often makes them more expensive than personal loans and other types of borrowing, even if they're easier to qualify for. 

Personal loan APRs (annual percentage rates) typically range from 6.49% to 35.99% and offer repayment terms between two and five years. Some high-risk loans, on the other hand, charge the equivalent of triple-digit APRs and require full repayment within two weeks to a month.

Examples of expensive, no-credit-check loans include:

• Car title loans: This type of secured loan requires you to give your car title over to the lender until the loan is repaid (or you forfeit your ownership). The amounts are typically small, and they usually have 30-day terms. You’ll also pay high fees and interest, which can equate to APRs of around 300%. A 2024 survey commissioned by the Center for Responsible Lending found that 64.5% of people who had taken out car title loans had trouble making their loan payments on time. 
• Payday loans: These loans are typically limited to $500 or less, and require you to repay the loan within two to four weeks. Payday loans should be avoided as well, as they typically come with sky-high APRs of 400% or more.
• Pawnshop loans: These short-term, secured loans let you borrow money by leaving a valuable item — like jewelry or electronics — as collateral at a pawnshop. You'll receive a fraction of the item's value and have a short period (usually 30 days) to repay the loan. If you can't repay, you risk losing your collateral. While these loans don't require a credit check, the high APRs and risk of losing collateral can make them costly and unfavorable.

Am I a high-risk borrower?

Lenders consider those with bad credit (or no credit) to be high-risk. That’s because they either don’t have a proven track record to show that they are responsible borrowers, or they’ve had trouble repaying their debts. Lenders want to see that each borrower is likely to repay the loan.

Here are the specific factors that will impact whether or not you’re considered high-risk:

• Credit score: A FICO score that’s below 580 falls into the “poor” credit category, meaning you’ll find it difficult to qualify for most loans. You can improve your credit score by making on-time payments or simply checking your credit report for any errors dragging down your score.
• Credit history: If your track record shows that you’ve defaulted on debts or made late payments in the past, that will make you a high-risk borrower — especially if those happened recently. Consider setting up autopay to help avoid missing payments. 
• Length of credit history: Similarly, if you don’t have a long credit history or no credit history, that’s considered a riskier bet. The lender won’t have enough information to go on to evaluate your credit profile and whether it’s safe to lend to you. However, you can consider taking out a credit-builder loan, which is designed for borrowers with no credit or limited credit history to boost their scores.
• Debt-to-income ratio (DTI): Your DTI is how much money goes toward debt each month divided by your pretax monthly income, expressed as a percentage. Most lenders prefer a DTI below 36% for personal loans. You can lower your DTI by paying off small debts or increasing your income — earning extra money as a rideshare driver or house-sitter, for example.
• Employment status: If you’re unemployed, this signals to the lender that you may not have a steady source of income with which to pay back a loan.

Check Out: No-Credit-History Loans

Why choose a high-risk loan?

There are a few times when it might make sense to choose a high-risk loan:

• Lack of alternative options: If you have poor credit, or no credit, you may not be able to qualify for traditional loans, so high-risk loans may be your only option.
• Faster access to funds: While trying to get a traditional loan may require you to wait until your credit improves, with a high-risk loan, you may be able to access cash with the credit score you have now.
• Maintain existing savings or assets: Taking out a high-risk loan may allow you to keep assets, such as an emergency fund or car, rather than having to cash out or sell. That can be especially helpful if you require those assets to get to work, or the nature of your work is somewhat unsteady.

Although these reasons are legitimate, it’s always important to carefully evaluate your financial situation before getting any loan, especially a high-risk loan. If you can’t keep up with the payments, you may end up losing your collateral, and damaging your credit.

Learn More: What Are Collateral Loans?

Drawbacks to high-risk loans

There are several important drawbacks to high-risk loans that you need to understand before taking one out:

• Higher costs: High-risk loans often have higher APRs (the total cost of the loan, including interest and unavoidable fees such as an origination fee). So you’ll pay more to borrow, long-term. And payday loans (a common type of high-risk loan) may have exorbitant fees that can balloon the cost of a relatively small debt up to a 400% APR or more.
• Risk of losing collateral: If you have a secured high-risk loan and you fall behind on payments, the lender could seize that asset as a way to ensure it gets its money back.
• Lower borrowing limits: Some lenders will compensate by only offering relatively small loan amounts to those who are considered to be high-risk borrowers. So if you require a large loan, you may not be able to access that if you fall into this category.
• Potential to get trapped in a debt cycle: Payday loans in particular are notorious for carrying high APRs and requiring short repayment terms, so borrowers may need to take out another payday loan to cover those costs, causing the cycle to continue.

If you’re considering a high-risk loan, keep an eye out for predatory lending practices usually associated with payday loans. This can come in the form of extremely high prepayment penalties or aggressive sales tactics by lender representatives such as pressuring you to sign the loan agreement.

Alternatives to high-risk loans

There are other options to consider besides high-risk loans.

• Bad-credit personal loans: Some lenders specifically offer personal loans for those with bad credit. Keep in mind, however, that the amount you can borrow may be limited for this type of loan and APRs are typically higher.
• Payday alternative loans (PALs): Offered by federal credit unions to their members, these short-term loans are legitimate alternatives to payday loans. There are two types of PALs. PALs I offers repayment terms that last up to six months, with loan amounts up to $1,000. You also need to be a member of a credit union for at least a month before you can access this type. PALs II offers repayment terms up to 12 months and a maximum loan amount of $2,000. With this type there is also no waiting period on eligibility. The interest rate for both is capped at 28%, including finance charges, which makes it easier to manage these loans and pay them off.
• “Buy now, pay later” services: With these services, it’s exactly as it sounds. You make your purchase now, and pay later over several weeks or months, depending on the service. Some apps may even let you pay in four installments, interest-free. Some companies may charge fees, either for using their app or if you make a late payment.
• Ask a family member or friend for a loan:  A family loan or a loan from a friend could offer significantly better terms than you’d find through a high-risk loan. This also won’t impact your credit since it isn’t reported to the credit bureaus. The key is establishing the terms in writing so that the expectations are clear.
• Get a qualified cosigner: If someone you know has good credit and is willing to become a cosigner on your loan application, they can help you qualify for a traditional loan. However, they would be responsible for the loan if you were to stop making payments.
• Seek out credit counseling: Credit counseling can help you get a handle on your finances through advice from a qualified counselor. Since it’s one-on-one, you can dig deeper into your situation and find a path forward that works best for you. Plus, it’s usually either free or low-cost. The Financial Counseling Association of America and the National Foundation for Credit Counseling are solid places to start your search.
• Debt management plan: If you’re trying to get out of debt, consider setting up a debt management plan with a credit counselor. These payment plans are designed to get you out of debt with a manageable monthly payment to your creditors. However, some debt management agencies may charge fees such as a set-up fee or a monthly fee to use their service.
• Improve your credit over time: Another approach is to focus on improving your credit so that you can qualify for a traditional loan. Some of the steps you can take here include getting a secured credit card or credit-builder loan to establish credit, paying down revolving debt, signing up for autopay to avoid late fees, and using a service like Experian Boost to get credit for paying things like utilities on time.

Interest rates and loan amounts by credit score

Borrowers with high credit scores are the most likely to qualify for the lowest interest rates and highest loan amounts, but that doesn’t mean you can’t qualify for a loan with bad or fair credit. Here’s a look at average rates for borrowers using the Credible marketplace according to credit scores, along with average loan amounts and average incomes.

Personal loan interest rates by credit score

Be sure to check your credit score before you start shopping for a personal loan. Many lenders have minimum credit score requirements, so knowing your score ahead of time can help you find your most viable options. Check your credit score for free with Credible's credit-monitoring tool, or find out if your bank or credit card company offers free credit monitoring.

Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.