What are High Risk Unsecured Loans?

High risk unsecured loans are loans that require no collateral for the lender but require the borrower to pay higher interest rates on the loan to compensate for this lack of collateral. These loans are usually taken up by people who have poor credit ratings and need fast money to pay off outstanding debts. The benefits of high risk unsecured loans for the borrower are that they are easy to obtain and there is no risk of losing a prized possession held by the lender as collateral. Unfortunately, the high interest rates can push the borrower into even more serious debt should he or she fail to make timely payments.

It is often very difficult for individuals who fall into a deep financial hole to dig themselves out. As their debt rises, financial institutions like banks become reluctant to lend them money for fear that there will be no repayment. If these people who are financially struggling do get a loan, it is often only after they put up their house, car, or some other cherished possession as collateral. For people like this, high risk unsecured loans may be a financial last resort.

The chief advantage of high risk unsecured loans is that they offer a borrower the opportunity to obtain large amounts of cash quickly without risking anything in collateral. Lenders who specialize in these loans require no collateral, which is why the loan is considered unsecured. Since these lenders also care little about the credit rating of a borrower, there is a high risk for them that the loan may not be repaid.

To compensate for this risk, lenders of high risk unsecured loans demand a much higher interest rate from borrowers when they repay the loan. These high rates are the method by which the lenders atone for the losses they might suffer from those who default. Lenders of this type of loan usually work in concert with collection agencies, so the borrower can't simply expect to default on the loan and get away with it.

If a borrower needs money quick and knows that he or she will be coming into some sort of money in the near future to help pay off the high interest rates, then high risk unsecured loans can be a wise financial move. Paying off the loans will also improve a person's credit rating so that future loans may be secured at better rates. The danger in these loans is that some borrowers use them as short-term solutions without considering the long-term ramifications. For such people, loans like this may adversely affect their already precarious financial situation.