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

A personal loan could make life easier if you need a debt consolidation loan, money for home improvements, or to cover 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's a quick look at loan types often labeled "high-risk":

• High-risk unsecured personal loan: A personal loan for borrowers with low credit scores, at higher rates or with stricter terms than standard personal loans.

• Payday loan: A short-term, small-dollar loan due on your next payday. Costs can reach triple-digit APRs, and these loans are best avoided.

• Car title loan: A secured loan that uses your vehicle as collateral. Miss a payment, and you could lose your car.

• Pawn shop loan: A secured loan backed by an item you leave with the pawn shop. Fail to repay, and the shop keeps your property.

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 or no credit and you're not able to get approved elsewhere. A quick check of your credit scores could tell you where you land. Credit scores generally run from 300 to 850, whether a lender uses a FICO Score or a VantageScore. Different lenders may use different score types and tier cutoffs, but generally, a score of 580 to 669 is considered fair credit and 300 to 579 is considered poor.

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 prequalify with a few lenders and review the offers you receive.

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

How to get approved for a personal loan

You don't need perfect credit to get a personal loan. These steps could help you find the right fit and put your best foot forward.

• Review your credit scores and reports. Check your credit scores and find any errors that could be dragging your score down. Dispute any inaccuracies with the credit bureau that reported them.

• Prequalify to preview your rates. Most lenders use a soft inquiry for prequalification. A soft inquiry does not affect your credit score. Prequalification gives you rate estimates, not guaranteed offers. Final terms depend on full underwriting and may differ from the estimate. You can prequalify with Achieve to check your rates.

• Strengthen your application. Pay down existing credit card balances if you can. You could also add a co-signer (someone who guarantees repayment but doesn't share the funds) or a co-borrower (someone who shares the loan and has equal access to the funds). Proof of steady income helps too.

• Compare real offers before you commit. Compare annual percentage rate (APR), fees, and funding time from at least two or three lenders. The lowest rate isn't always the best deal if the fees are high.

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

Personal loans for bad credit aren't automatically bad. Loans with fair terms are out there, and comparing a few options could help you find the best fit 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 typically carry higher costs, fees, or rates. Be skeptical of any lender that promises guaranteed approval.

• 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

• Prequalify with Achieve to check your rate, then compare a couple of other lenders on APR, fees, and funding time. A soft inquiry does not affect your credit score. Learn what kind of loans you could get pre-approved for and how much you might pay to borrow.

• 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.

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

Find out if you qualify.