A loan can be helpful when you are facing a financial challenge. In exchange for fast access to cash, lenders will expect repayment, along with interest, on time.
Applying for a loan doesn’t necessarily guarantee that you will be granted the loan by a lender. There are usually certain criteria to be fulfilled. With each loan granted the lender assumes a certain level of risk, which means that in order to offset that risk, a certain interest rate must be charged or a borrower must provide an asset as collateral.
What are high risk loans?
A high risk loan is a credit product that is considered more likely to default, compared to other more conventional loans. It may result in higher interest rates and changes to the loan term, so as to compensate for the additional risk taken.
Examples of high risk loans include loans that are issued to borrowers with poor credit as well as those with no credit history at all. No income verification loans as well as no document loans are considered high risk loans because loans are granted based on individual affordability rather than creditworthiness.
What are some of the risk factors that determine whether loans are high risk loans or not?
The ability to repay
If a lender regards a loan applicant as likely to be unable to repay the loan amount, this constitutes high risk.
Security for the loan
If a potential borrower is able to provide security for the loan, there is a lower level of risk involved for the lender. If he borrower defaults on payments, the lender is able to sell the asset in order to recoup costs.
Past history of repayment
A borrower with a good payment history is less likely to be considered to be a high risk. A borrower with a sketchy payment history is more likely to qualify for high risk loans. It should be noted however, that borrowers who take out high risk loans and repay the loan terms as greed may improve their credit.