High-Interest Credits: What Are and How They Work
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High-Interest Loans: What They Are and How they Work
High-interest loan is one with an annual percentage rate above 36% that can be difficult to pay back. There are alternatives that may be less expensive.
Updated on January 23rd, 2023
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If you’re in a bad financial position or no credit, a high-interest loan may seem like the only option for paying an unexpected expense. However, a loan with a high interest rate could trap you in a vicious cycle of debt, and even make the situation worse.
Consider alternatives with lower costs before obtaining an loan with a high interest rate. If you are offered a high-interest loan be aware of what to look out for to make sure the loan will be more beneficial than it can hurt.
What is an interest-only loan?
A high-interest loan has an above 36% rate, the highest APR which most consumers think is affordable. High-interest loans are offered by storefront and online lenders that promise fast funding and simple applications, often without checking your credit score.
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High-interest loans typically range from of a few thousand dollars or less. There are some shorter-term payday loans, but others will require repayment in a couple of months or weeks.
How high-interest loans are harmful
Consumer advocates claim that the high APRs lead to large monthly payments that can be difficult to make punctually. At high rates the total cost of interest could be higher than the amount you borrowed.
If you’re unable to pay the loan, a lender with a high interest rate could offer to refinance the loan. This usually means getting a new, bigger loan and one with a more lengthy duration and a higher interest rate than what you originally needed.
Nerdy Tip
A installment loan with an APR less than 36% might be a cheaper way to borrow money. These loans tend to be more expensive than high-interest loans that are repaid over years instead of months and come with lower interest rates, so you pay less to borrow the money. Lenders typically require a credit assessment to apply, but you can find for bad credit.
High-interest loan examples
There are four lenders who offer high-interest loans, plus the monthly installment and total interest costs on a 12-month $2000 loan at the maximum rate of interest for the lender. If you take a loan with a rate of 36 that means the monthly installment on this loan will be $201, and you’d be paying $411 in interest.
Lender
APR range
Example of a monthly payment
Example total interest costs
34%-155%.
$337.
$2,040.
59%-160%.
$343.
$2,117.
19%-199.99%.
$396.
$2,746.
59.8%-299%.
$535.
$4,425.
How much interest is too much?
A way to judge if a loan is overpriced is to examine the monthly payments. Small-loan payments should take up less than 5percent of your income per month as per the Pew Charitable Trusts. Include the loan payments to your monthly budget to see whether they fit. If you’re in a tight spot, taking the loan may be a risky option.
Consider the total interest costs. Use an to see the amount you’d have to pay for interest only. If the figure is greater than 50 percent of the amount that you’re borrowing, your interest cost is inflated.
Also, you can use the interest cost to calculate how your loan will be worth for you. How much more would you be willing to pay to get the money?
What should you look for in a high-interest loan
If the sole loan you qualify for has an APR that is high, search for a lender who:
Discloses the APR. A lender is required by law must reveal the APR prior to when you sign the loan agreement. It is possible to use the APR to compare the full price of a loan to one.
Checks your credit. Even if it’s just a , a lender that checks your credit will make an effort to determine if you can repay the loan.
Are payments used to pay principal. Monthly payments are supposed to pay principal and interest. Interest-only payments don’t reduce the principal of the loan, and interest continues to accrue at the same rate. Be sure to review the loan’s amortization plan before you agree to borrow.
Reports payments. The lender must make your monthly payments available to at minimum one- but ideally all three of the . In the event that your monthly payments have been on time the reporting could help your credit.
The best high-interest loan alternatives
Credit card holders with bad credit (a score of less than 630) or no credit may have lower options for high interest loans.
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Alternatives for bad-credit borrowers
The lenders below limit APRs of 36% or less and are able to lend to borrowers with low credit scores.
personal loans can be as small as $1,000, and you have access to credit-building tools, like free credit health analysis. The lender also offers auto-secured loans that allow you to make use of your vehicle as collateral to elevate the chances of obtaining a loan or receiving a lower rate.
loans, which are similar to those offered by Upgrade, require just a few days before they are approved and paid. You can receive a rate discount for setting up automated payments.
says it can send personal loan cash to your bank account on the day after the application is approved. It is also possible to make payments every two weeks or every month to keep with your pay schedule.
The credit union can accept borrowers with poor credit by taking a look beyond an individual credit score to consider the entire financial picture, which includes an account with the lender. Federal credit unions set their rates at 18%, and some offer small loans that are a couple hundred dollars. For example, First Tech personal loans begin at $500, while Navy Federal loans start at $250.
There is another credit union offering with a small amount of offering. These loans could range from between $100 and $2,000, with the repayment term of between a few months and one year, and maximal APRs that are 28%. There is no requirement for a lengthy membership to qualify for these loans, neither do you need a long membership.
Check if you are pre-qualified for an individual loan – without affecting your credit score
Simply answer a few questions to receive personalized rate estimates from multiple lenders.
Loan amount
on NerdWallet
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Alternatives for those with thin or zero credit histories
Lenders who offer loans to those with weak or no credit history consider other factors to determine if they qualify such as cash flow and employment.
The lender can accept those with credit histories too thin to produce a credit score. The lender considers details like your location of residence and work and where you attended college and whatever credit history is available to help make an loan decision.
Oportun offers loans between $300 and $10,000 to borrowers with good credit (630 to 689) or none. To determine if you are eligible, Oportun reviews income and expenses. You may also add a co-signer , or security to your loan to help your chances of being approved.
is available in only a handful of states but is only available in a handful of states, but offers low-rate loans to those with no credit and those trying to find jobs or meet other basic needs. The lender qualifies you using your bank account history. The amount of loans and APRs differ by state and purpose However, it might be the best choice when you reside in a state where Capital Good Fund lends.
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Other borrowing alternatives
An informal agreement or nonborrowing alternative could be a suitable alternative to paying no interest in the event of an emergency or financial hardship.
or money borrowed from someone you trust can help you bridge the gap in your income without having to do a credit check. Draw up the contract with the interest rate and payment schedule to make the terms clearly understood by both parties.
Plans for payment are a good method of splitting payments towards your rent, utility bills and credit cards or even your doctor’s office. Your utility company, mortgage lender and credit card issuer might require a formal form to apply for the hardship or payment deferral However, you will need contact your landlord or doctor directly.
Local charities and nonprofits may assist you in obtaining food, clothing or transportation. These organizations can include food banks and religious organizations and others can assist you pay for emergencies or utility bills.
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About the author: Annie Millerbernd is an individual loans writer. Her work has appeared on The Associated Press and USA Today.
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