How to Get Out of a High-Risk Loan

Written by: Kristyn Pilgrim
Updated: 9/04/20

When you’re strapped for cash and need help quickly, emergency loans can seem like the only solution. Unfortunately, these high-risk loans can cost more than most students realize.

In this guide, we’ll walk you through the main types of high-risk loans, explain how you can get out of them, and offer a few alternatives to consider.

What Are High-Risk Loans?

High-risk loans typically offer quick financing with high interest rates or other risky terms. Students often turn to high-risk loans for financial assistance because they do not have enough credit history to seek other loan alternatives.

Here are five of the most common high-risk loans to look out for.

1. Payday Loans

This type of high-risk loan is one of the most common. In fact, every year, approximately 12 million Americans take out payday loans to help make ends meet. Payday loans offer quick cash to people (typically those with lower incomes and poor credit scores) in exchange for higher interest rates. These short-term loans get their name from the loan terms: Typically, borrowers are required to pay back the full loan amount and interest by their next payday.

Payday loans typically allow you to borrow $500 or less and can have interest charges between $10 to $30 for each $100 borrowed (depending on your state’s laws). For example, you could borrow $500 and end up owing $650 ($30 x 5 = $150; $150 + $500 = $650). According to Consumer Finance, credit card APRs (annual percentage rates) range from 12% to 30%, while APRs on payday loans can be upward of 400%.

If you cannot pay your loan back on time, many payday lenders allow you to roll your balance into a new loan, where you’ll be charged additional interest.

2. Car Title Loans

Car title loans are high-risk, short-term loans that offer your car, truck, or motorcycle as collateral. These loans can have upward of 250% to 300% APRs, and if you’re not able to pay the loan in time, you can lose your vehicle. These loans typically have to be repaid within 30 days.

Loan amounts can vary, but car title loans typically allow you to borrow between $100 and $5,500 at one time. Like payday loans, if you can’t afford to pay the loan back in time, you may be able to roll over the amount owed to a new loan, where it will keep accruing interest at a high rate, leading to heavy interest charges.

3. 401(k) Loans

If you have a 401(k), you might be tempted to pull out some of your retirement funds in the form of a 401(k) loan if you get into a financial bind. Unfortunately, if you borrow funds before you turn 59 1/2, you’ll be charged a 10% penalty.

Employers typically have their own rules regarding repaying a 401(k) loan, but some will take automatic payments out of your check. Not only does this impact your retirement savings, but you’ll also need to be prepared to pay 401(k) loan fees, such as origination and administrative fees. Also, if you leave your job before the 401(k) loan is repaid, you’ll need to repay the balance sooner than your original loan terms.

4. Pawn Shop Loans

A pawn shop loan requires you to put up a valuable item (such as jewelry, TV, antique furniture, or an heirloom) as collateral in exchange for a short-term loan. Typically, no credit check is required, but as a result, these loans also come with high interest rates and hefty fees (such as storage fees for the item they hold for you).  

If you’re unable to repay the full loan plus interest within the agreed-upon period, you’ll forfeit ownership of any items you’ve left as collateral.

5. Early Tax Refund Loans

If you’re expecting a tax refund this year and need extra funding for your educational expenses, you might think taking out an early tax refund loan is a good idea. Since you’ll receive the money at a later date anyway, many students might believe this high-risk loan option is a smart move.

Unfortunately, it can be hard to calculate your tax refund ahead of receiving your official tax forms. In this case, if you receive more than your refund amount, you’ll owe the difference. You’ll also be responsible for paying interest on this loan, with rates up to 36%.

Now that you understand the different types of high-risk loans, let’s look at how to get out of these agreements using alternative borrowing methods.

Is It Possible to Get Out of a High-Risk Loan? These Alternative Loan Solutions Can Help

It’s often better to look for alternative options, but if you’ve already taken out a high-risk loan, you may wonder if it’s possible to get out of it. If you’re worried about paying the full amount on time, you might want to consider these alternative loans.

Turn to Debt Consolidation and Student Emergency Loans

Debt consolidation loans can help students and other borrowers with low credit scores pay off high-risk loans quickly while offering much lower interest rates. These loans still need to be paid back, but they typically have much longer loan terms and can save you money in interest and late fees. You can apply for debt consolidation loans with your current bank or credit union or look for an online lender.

If you can pay the loan back in a short amount of time but don’t want to risk the fees, you can also check with your school to see if they offer emergency loans. These loans offer students in financial need varying amounts and are typically interest-free. These loans can help students pay off high-risk loans without accruing more interest.

Other Ways for Students to Repay and Avoid High-Risk Loans

If you’re not able to apply for a debt consolidation loan or work with your school for emergency loan financing, you have other options. Since many high-risk loans have APRs far above credit card averages, it could make financial sense to pay off the loan with your credit card. Just make sure you have a path to repayment, so you can quickly pay off your credit card debt. 

Your bank or credit union might also offer some form of a payday loan at a much more affordable interest rate and with better repayment terms. These payday alternative loans (also called PALs) are designed to help students and those with poor credit borrow money easily, often not requiring a credit check.

Lastly, consider taking out a personal loan, which can help you pay off your high-risk loan debt right away while extending your loan over a longer period. You can apply for a personal loan with your existing bank or credit union or opt for an online lender with more flexible credit criteria. 

If possible, turn to these alternative solutions before securing a high-risk loan and falling prey to large interest rates, hidden fees, or, worse yet, losing your car or valuables if you can’t repay the loan on time. If you already have a high-risk loan, the above alternatives are also good options to help you save money and lower risk when repaying your loan.

Maximize Your Education With Resources From

Paying for college can be difficult, and covering additional expenses when money gets tight can make high-risk loans seem like your only option. While taking out a high-risk loan can seem like a good, temporary solution, there are better financial alternatives to explore. Instead of turning to high-risk loans, look into debt consolidation services, emergency student loans, payday alternative loans, credit cards, and personal loans.

Let also help you make smart financial decisions by connecting you with the educational financing resources you need.