High-Interest Loans: What They Are and How They Work

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High-Interest Loans: What They are and how they work
An interest-rate high loan is one that has an annual percentage rate above 36%, which can be tough to repay. You may have cheaper options.


Updated on January 23rd, 2023

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If you're in a bad financial position or no credit, a high-interest loan could be your only option for paying an unexpected cost. However, a loan with a high interest rate could trap you in a cycle of debt, and even cause more problems.
Consider alternatives with lower costs before obtaining the loan with a high-interest rate. If you get a high-interest loan be aware of what to look out for to make sure that the loan will be more beneficial than it hurts.
What is an interest-only loan?
A high-interest loan has an above 36%, which is the most APR that many consumer advocates believe is reasonable. High-interest loans are provided by both storefront and online lenders that promise fast funding and easy application, and sometimes without checking your credit score.
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High-interest loans are usually of a couple of thousand dollars or less. Some are shorter-term payday loans, but others will require repayment over a few months or weeks.
How high-interest loans can be harmful?
Advocates for consumers say that high APRs lead to large monthly installments that are difficult to pay punctually. If rates are high, the total interest cost could be higher than the amount of money borrowed.
If you're unable to pay the loan, a lender with a high interest rate could offer to refinance the loan. This often means getting a new, bigger loan and one with a more lengthy term and a higher interest rate than what you originally needed.
Nerdy Tip
An installment loan with an APR below 36% may be a cheaper way to obtain money. These loans tend to be larger than high-interest loans that are repaid over time rather than months and are backed by lower rates, meaning you pay less to borrow the money. Lenders typically require a credit assessment for approval, however you can find for bad credit.


High-interest loan examples
Four lenders provide high-interest loans as well as the monthly payment and total interest costs on a 12-month, $2,000 loan at the lender's maximum APR. If you take a loan with a rate of 36 that means the monthly installment on that loan would be $201, while you'll pay 411 dollars in interest.
Lender



APR range



Example 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 many times a year is enough interest?
One method to determine if the loan is too expensive is to look at the monthly installment. Small-sized loan payments should make up not more than five percent of your income each month, according to the Pew Charitable Trusts. Include the loan payments into your budget for the month to determine whether they fit. If the budget is tight and you're in a tight spot, then taking the loan may be a risky option.
Also, consider the total interest costs. Use an to see how much you'd pay in interest alone. If that number is more than 50 percent of the amount you're borrowing, your interest costs are exaggerated.
Then, consider the interest costs to measure how your loan will be worth for you. How much extra would you have to pay for the loan?
What to look for in a high-interest loan
If the sole loan you are eligible for has a high APR, look for a lender who:
The APR is disclosed. The law requires that a lender must disclose the APR before you sign a loan contract. You can use the APR to determine the total price of a loan to one.
Checks your credit. Even if it's an, a lender who examines your credit makes an effort to determine if you're able to pay back the loan.
Are payments used to pay principal. Monthly payments should pay down principal and interest. Interest-only payments don't reduce the principal amount of the loan, therefore interest continues to accrue at the same rate. Make sure to check the amortization schedule of your loan before you agree to borrow.
Reports payments. The lender must send your monthly payment to at minimum oneat a minimum, but it is recommended to at least three of the . If your payments are on time and in good standing, this report can improve your credit.

Top high-interest loan alternatives
People with poor credit (a score of less than 630) or no credit may have cheaper alternatives in comparison to higher-interest loans.
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Alternatives for bad-credit borrowers
The lenders below cap APRs of 36% or lower and can lend to borrowers with low credit scores.
personal loans can be as small as $1000, and you have access to credit-building tools, like free credit health insights. The lender also offers auto-secured loans which means you can utilize your car as collateral to improve the chances of obtaining a loan or obtaining a lower interest rate.
loans that are similar to those of Upgrade, take several days for approval and to be funded. You can get a rate discount when you setup automatic payments.
It claims it will transfer the personal loan money to your bank account on the day after your application is approved. You can also pay biweekly or on a monthly basis to align to your payment schedule.
The credit union can accept borrowers with poor credit by considering more than the credit score to the entire financial picture, which includes an applicant's relationship with the credit union. Federal credit unions set their APRs at 18%, and some provide small loans of just a few hundred dollars. For example, First Tech personal loans start at $500 and Navy Federal loans start at $250.
Another credit union with small amounts is the offering. These loans can be between $100 and $2,000, with repayment terms ranging from between a few months and an entire year, and can have maximum APRs of 28 percent. There is no requirement for a lengthy membership to be eligible or apply.
Check if you are pre-qualified for an individual loan - without affecting your credit score
Answer a few simple questions to get customized rate estimates from several lenders.


Loan amount
on NerdWallet








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Alternatives for people with weak or zero credit histories
Lenders who offer loans to those with weak or no credit histories consider other data to help them qualify including cash flow and employment.
They can also approve applicants with credit histories too thin to produce an adequate credit score. The lender uses data such as your location of residence and work and where you attended the college, and any credit history that is available to determine an loan decision.
Oportun provides loans from $300 to $10,000 to borrowers with good credit (630 to 689) or with no credit. To determine if you are eligible, Oportun reviews income and expenses. You may also include a co-signer or security to your loan to help your chances of qualifying.
It is only available in one state, however it is only available in a handful of states, but offers low-rate loans for borrowers who have no credit or who are who are struggling to find employment or meet other necessities. The lender will assess your eligibility based on your bank's history. Loan amounts and APRs vary by state and purpose, but it could be the best option for you for if you reside in a state that Capital Good Fund lends.
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Other borrowing alternatives
An informal agreement or nonborrowing alternative may be an option to pay no interest during an emergency situation or in financial difficulty.
or money you borrow from someone you trust can aid in bridging an income gap without credit check. Make the contract with interest and a payment schedule so the terms are transparent to both parties.
Payment plans can be a great way to split payments toward your rent, utilities or credit cards, as well as your doctor's office. Your utility provider, mortgage lender and credit card issuer may require a formal form to apply for payments deferral or hardship plans However, you will need consult the landlord or your doctor's office directly.
Local nonprofits and charities can aid you with food, clothing or transportation. These organizations can include food banks as well as religious groups and others can assist you cover emergency expenses or utility bills.
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About the writer Annie Millerbernd is an individual loans writer. Her writing has been featured in The Associated Press and USA Today.







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