What Does High Risk Mean for a Bank Loan?

What Does High Risk Mean for a Bank Loan?
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High-risk borrowing applies to consumers with low credit scores. If your credit score falls below 660, you may meet the criteria for a high-risk loan, also known as a subprime loan, according to the Federal Deposit Insurance Corporation website. Lenders often place subprime loans in a separate category, assigning different terms due to the risk.

Credit Issues Equaling High Risk

Several situations can occur that can place you in a high-risk category for borrowing. If your debt-to-income ratio is higher than 36 percent, lenders may consider you overextended with too much debt, according to Bank of America. Some lenders may be more lenient, flagging DTIs of 50 percent or more, according to FDIC. More than two 30-day payment delinquencies in the past year or one 60-day delinquency in the past two years is also a marker for subprime borrowers. Chargebacks, judgments, repossessions and foreclosures within the last two years can pose significant credit problems. A bankruptcy within the past five years is also a red flag.

Difficult Approval

Submitting an application for a loan when you have issues that classify you as high risk can make the approval process more difficult. The risks to lend you money often make a lender more cautious, which usually results in more investigation and analysis. A lender might make you complete additional forms that seek more information about your income and financial history. This additional investigation could make the approval process take longer than average.

Higher Down Payment

To offset some of the risk of a subprime loan, lenders may require a higher down payment. Depending on the type of loan, your credit score and the lender, a down payment for a high-risk loan could be as much as 20 percent.

Higher Interest Rates

Lenders may also increase the interest rate for a high-risk loan. For example, the difference in interest rate between a low-risk and a high-risk mortgage could be 2 to 3 percentage points, according to Realtor.com. The dollar value of 3 percentage points translates to $2,400 per year for a $100,000 loan. Auto loan interest rates for subprime borrowers follow the same trend with a spread of approximately 3 percentage points.