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 with an annual percentage rate above 36% that can be difficult to repay. You might have better options.


Last updated on Jan 23, 2023

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If you have bad credit or have no credit, an interest-only loan could be your only option to pay an unexpected expense. However, the loan with a high-interest rate could trap you in a cycle of debt and make the situation worse.
Find alternatives that are less expensive before taking a loan that has a high interest rate. If you are offered an interest-only loan be aware of the signs to look for to make sure that the loan helps more than it does.
What is a high-interest loan?
A high-interest loan includes a higher than 36%, the highest APR that many consumer advocates think is affordable. High-interest loans are offered by both storefront and online lenders that promise fast funding and easy application, and sometimes without checking your credit.
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High-interest loans typically range from of a couple of thousand dollars or less. Some are shorter-term payday loans, but others will require repayment over a few weeks or even months.
How can high-interest loans can be harmful?
Advocates for consumers say that high APRs result in large monthly payments that can be difficult to make on time. If rates are high, the total interest cost can be more than double the amount of money borrowed.
If you are unable to repay the loan, a lender with a high interest rate might offer to refinance your loan. This usually involves obtaining a new, larger loan or one with a longer time frame and a higher interest rate than what you originally needed.
Nerdy Tip
A installment loan that has an APR lower than 36% may be a cheaper way to borrow money. These loans tend to be more expensive than high-interest loans and are paid back over time rather than months and are backed by lower rates, meaning you pay less for the cash. The majority of lenders require a credit assessment for approval, however you can find for bad credit.


High-interest loan examples
There are four lenders who provide high-interest loans, plus the monthly payment and the total charges for interest on a twelve-month two-dollar loan at the maximum rate of interest for the lender. With a 36% APR that means the monthly installment on that loan would be $201, and you'd pay $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 many levels of interest are too much?
One way to tell whether a loan is excessively expensive is to take a look at the monthly installment. Small-loan repayments should comprise not more than 5percent of your income per month as per the Pew Charitable Trusts. Add the loan installments into your budget for the month to determine whether they are in line with. If you're in a tight spot then taking out the loan might be a risky option.
Also, think about the total interest costs. Utilize an application to determine how much you'd pay in interest alone. If that figure is more than 50 percent of the amount that you're borrowing, your interest costs are inflated.
Finally, use the interest cost to calculate how much 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 are eligible for has an APR that is high, search for a lender with:
The APR is disclosed. A lender is required by law must disclose the APR before you sign the loan agreement. The APR can be used to evaluate the cost of one loan against the cost of another.
Checks your credit. Even if it's an, a lender who examines your credit makes an effort to determine if you are able to repay the loan.
Does the principal portion of payments get paid for. Each month's payments should help pay off principal and interest. The interest-only payment doesn't affect the principal amount of the loan, therefore interest continues to accrue in the exact same amount. Be sure to review the loan's amortization plan prior to committing to borrowing.
Reports payments. The lender must report your monthly payments to at minimum oneat a minimum, but it is recommended to all three of the . When your payment is on time, this reporting can help your credit score.

The best high-interest loan options
Borrowers with bad credit (a score below 630) or no credit may have better alternatives to high-interest loans.
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Alternatives for borrowers with bad credit
The lenders below cap APRs of 36% or less. They can lend to borrowers with low credit scores.
Personal loans can be as small as $1,000. You have access to credit-building tools, like free credit health insights. The lender also offers auto-secured loans, meaning you can 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, take just a few days before they are approved and approved and then repaid. You can get a rate reduction when you set up automated payments.
The company claims to be able to transfer your personal loan funds to your bank account on the day following the date that your application has been accepted. It is also possible to make payments biweekly or on a monthly basis to align to your payment schedule.
The credit union can accept borrowers with poor credit by taking a look beyond the credit score to the whole financial picture, including an applicant's relationship with the credit union. Federal credit unions set their rates at 18% and some even offer loans that are a couple hundred dollars. For example, First Tech personal loans start at $500 and Navy Federal loans start at $250.
are another small-dollar credit union offering. These loans are typically $100 to $2,000, have repayment terms ranging from between a few months and one year, and the maximum rate of APR 28 percent. There is no requirement for a lengthy membership to apply or apply.
See if you pre-qualify for an individual loan - without affecting your credit score
Just answer a few questions to receive personalized rate estimates from multiple lenders.


The loan amount
on NerdWallet








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Alternatives for those with thin or none
Lenders who cater to those with weak or no credit history will consider other information to qualify them including cash flow and employment.
The lender can accept those with credit histories not sufficient to establish an adequate credit score. The lender considers information such as where you live and work as well as where you went to school and what credit history is available to determine a loan decision.
provides loans of $300 to $10,000 to borrowers with good credit (630 to 689) or with no credit. To be able to approve you, Oportun reviews income and expenses. It is possible to add a co-signer or security to your loan to help your chances of qualifying.
It is only available in few states, but offers low-rate loans for borrowers who have no credit and those who are struggling to find employment or to meet other needs. The lender can determine your eligibility by looking at your bank's history. Loan amounts and APRs vary by state and purpose, but it could be your best option for if you reside in a state that Capital Good Fund lends.
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Other borrowing options
An informal arrangement or nonborrowing alternative might be a good option to pay no interest during an emergency situation or in financial difficulty.
or money you borrow from a trusted person can aid in bridging an income gap without a credit check. Create an agreement that contains an interest schedule and a payment plan to make the terms clearly understood by both parties.
Payment plans can be a great option to divide your payments between your utility bills, rent or credit cards, as well as your doctors' offices. Your utility company, credit card lender, mortgage lender or issuer may have a formal application for payments deferral or hardship plans, but you may have contact your doctor's office or landlord directly.
Local charities and non-profits can help you get clothing, food or transportation. They can be food banks as well as religious groups as well as some that can help pay for emergency expenses or utility bills.
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About the author: Annie Millerbernd is a personal loans writer. Her work has appeared on The Associated Press and USA Today.







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