High-risk personal loans: Smart borrowing options for bad credit

A personal loan could make life easier if you need cash to consolidate debt, pay for home improvements, or meet another financial need. Personal loans for bad credit help people with lower scores get the money they need to reach their goals. 

These loans sometimes get labeled as high-risk because of the way they're structured and who they're designed for. It's important to know what that means for you before you borrow. 

We've got some tips to help you choose a loan with confidence. 

What makes a personal loan ‘high-risk’?

A personal loan is usually high risk when the borrower has bad credit or no credit at all. 

Lenders use your credit history to gauge how likely you are to pay back what you borrow. A lower credit score suggests a higher possibility that you might default, or not pay. The lender's risk is that they'll lose money on the loan. 

High-risk loans usually favor the lender more than the borrower, since they charge higher rates or fees and offer lower loan limits. Here are some examples of how these loans may work. 

• Secured loans. Secured loans require you to pledge collateral (something of value you own). If you don't repay the loan, the lender keeps your collateral. Pawn shop loans and car title loans are two examples of secured loans. Unsecured loans for people with higher credit scores don't have that requirement. 

• Payday loans. Payday loans or cash advance loans let you get money from your paycheck early, but the cost can be high. These loans are marketed to people with bad or no credit who need to borrow small amounts fast. The trade-off is that the interest you pay could end up in the triple-digit range. 

These are the kinds of loans you typically want to steer clear of, since the risk to you outweighs any convenience they offer.

When might a high-risk personal loan be your only option?

You may need to consider a high-risk personal loan if you have poor credit/no credit and you're not able to get approved elsewhere. A quick check of your credit scores could tell you where you land. For reference, FICO credit scores range from 300 at the low end to 850 at the high end. 

Aside from credit scores, lenders also use other factors to gauge risk:

• Income and employment history

• Overall credit history

• How much debt you already have

• Your debt-to-income (DTI) ratio, or how much of your income goes to debt repayment each month

One way to tell if your only option is a high-risk loan is to try and get pre-qualified for a loan. Pre-qualified means a lender does a cursory review of your finances to decide if you qualify for a loan. 

Lenders will ask what range your credit score is in, but they may not check your credit. If you self-report your score range accurately, you should be able to quickly find out whether you're pre-qualified. 

If you're not able to get pre-qualified, that's a sign that you may need to consider high-risk loan options. 

How to spot a high-risk loan and avoid getting trapped

Personal loans for bad credit aren't automatically bad. You'll just need to do your homework to find a loan that offers the best and fairest terms for your situation. 

That being said, there are some red flags to watch out for when shopping for a personal loan. Proceed with caution if you come across loans with these features:

• Guaranteed approval with no credit check. No-credit-check loans might sound attractive, but what's mostly guaranteed is that you'll pay a much higher interest rate to borrow. 

• Hidden fees or lack of transparency. If a lender refuses to answer your questions or tries to double-talk you about the fees, that's a sign to look elsewhere for a loan. 

• Pressure tactics. Less-than-reputable lenders will work overtime to try to persuade you to get a loan. If you're being pressured to commit to a loan, don't be afraid to take a step back. 

• Unrealistic terms. Any loan you get, whether it's high-risk or not, needs to fit your budget. If a lender proposes rates or terms that are well beyond what you can afford, you don't have to take them up on their offer. 

• Misinformation. Bait-and-switch tactics could trap people into loans they can't afford. For example, you might notice a low rate advertised on the lender's website only to apply and find out that your rate is much higher. If a lender does this, that's most likely a loan you don't want. 

• Unrealistic promises. If a lender makes a claim that seems too good to be true, it probably is. Trust your instincts, and if something feels off, look for a better loan option. 

Alternatives to high-risk personal loans

If you'd like to avoid a high-risk loan, there are some other ways you could get the money you need. Here are a few ideas to consider. 

• Ask friends and family. If they're open to the idea, your friends and family might front you cash for a loan. You won't need a credit check, and they may not even charge interest. It's a good idea to get a loan agreement in writing so you both know what to expect from the arrangement. 

• Try a cash advance app. Cash advance apps could spot you $200 to $500 with no interest. You pay the money back out of your next paycheck. This is a less-risky alternative to a payday advance loan. Generally, the app has to be set up in advance.

• Use a credit card. If you have a credit card, you could use it to pay for what you need. Unless your card has a 0% APR you'll pay interest, but it's an option you might consider in an emergency.

• Buy now, pay later. Buy now, pay later apps let you buy things online or in stores and pay for them over time in installments. Many buy now, pay later options don't charge interest, and they don't require a credit check either. 

• Apply with a co-signer. A co-signer is someone who adds their name to the loan application with you and shares legal responsibility for the debt. It may be easier to get an unsecured loan with a low rate if your co-signer has good or excellent credit. 

While these options aren't high-risk, they're not risk-free either. A loan from a friend, for example, may have no interest, but you could hurt the relationship if you don't pay them back. Looking at all the angles can help you decide which high-risk loan alternative works best for you. 

What's next

• Check your credit scores and reports if you haven't done that lately. All three credit bureaus—Equifax, Experian, and TransUnion—allow you to access your credit report for free every week. 

• Get rate quotes from two to three lenders to learn what kind of loans you could get pre-approved for and how much you might pay to borrow. 

• Look in your circle of friends and family for someone with good credit who might act as a co-signer for you.