What Are Riskier Loans Called? A Deep Dive into High-Risk Lending

Taking out a loan is always a risk But some loans are riskier than others These high-risk loans are often aimed at borrowers with poor credit who may struggle to repay, So what exactly are these potentially problematic loans called? Let’s take a closer look,

Subprime Loans

“Subprime” loans are those that are given to people with bad credit. These borrowers often have scores below 620. To make up for the higher risk of default, subprime loans have higher interest rates.

A lot of subprime mortgages were given out during the housing bubble in the 2000s, even to people with bad credit. Lenders offered low “teaser” rates that later went up to levels that families could not afford. When borrowers defaulted, it contributed to the broader financial crisis.

While standards have tightened, subprime lending still exists today. More people can get these loans, but they come with more risk. Borrowers must be cautious of high rates and predatory terms.

Payday Loans

Payday loans provide a quick influx of cash but they come at a steep price. To get one borrowers provide a post-dated check or electronic access to their bank account. On their next payday, the full loan amount plus fees is withdrawn.

Annual percentage rates on payday loans often exceed 300-400%. The whole loan is due all at once in two to four weeks. This structure makes the loans very difficult to repay. Borrowers often roll over the debt triggering more fees.

Five states and D.C. currently ban payday lending. The Consumer Financial Protection Bureau also enacted regulations in 2017 to protect consumers. But in many places, these risky short-term loans are still available.

Title Loans

With a title loan, borrowers use their car as collateral. To get one, they temporarily surrender their vehicle’s title to the lender. If the loan isn’t repaid as agreed, the lender can seize the car.

Title loans often carry APRs above 200%. And borrowers typically have just one month to repay the full amount. If they can’t, the lender may offer to roll over the loan — for yet another expensive fee.

Only 16 states allow auto-title lending. Other states have outlawed or restricted the practice due to concerns over high costs and repossessions. If considering a title loan, tread very carefully. There’s a real risk of losing your vehicle.

Credit Card Cash Advances

While not technically loans, credit card cash advances allow immediate access to cash. You can get funds through an ATM or bank teller using your card. But this convenience comes at a steep cost.

Cash advance fees typically run 3-5% of the withdrawal amount, or at least $10. And cash advance APRs are usually much higher than normal purchase rates. The interest starts accruing immediately, with no grace period.

For someone already carrying balances, cash advances can make credit card debt much harder to pay off. Use this option only as a true emergency measure, not everyday spending.

Hard Money Loans

Also called bridge loans, hard money loans are issued by private investors rather than banks. They are usually secured by real estate and carry higher interest rates.

Hard money lending fills a niche, helping borrowers who don’t qualify for bank financing. This includes real estate investors and developers. But the loans are considered high risk for several reasons.

Interest rates typically range from 7-15%, much pricier than conventional mortgages. Loan-to-value ratios max out at 70%. And terms are often less than one year. With strict repayment requirements, defaults are not uncommon.

Pay Stub Loans

Some lenders offer pay stub or payday loans based solely on proof of income. They may not check credit or require collateral. But they do charge exceptionally high rates.

A typical pay stub loan might have a 3-6 month term and APR of 390% or more. Some lenders also tack on large origination fees equal to 20% or more of the loan amount.

While quick and easy to qualify for, these loans can trap borrowers in repeat borrowing. Short terms and balloon payments make them tough to budget for and repay on time. Borrowers should exhaust other options first.

Final Thoughts

When used recklessly, high-risk loan products can do more harm than good. Their high costs and rigid terms often create cycles of debt for consumers.

However, safer alternatives do exist. Federal loans and lending programs can provide more affordable financing options. Nonprofit credit counseling services can also help consolidate debt and create manageable monthly plans.

If a high-risk loan seems unavoidable, compare multiple offers carefully. Review all fees, APRs, and terms before committing. With caution, these loans can serve as a temporary bridge past financial hardship. But tread this path very carefully.