High-Interest Loans: What They Are and How They Work
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If you have bad credit or no credit, a high-interest loan can seem like your only option to pay an unexpected expense. But a loan with a high interest rate could trap you in a cycle of debt and make the situation worse.
Explore cheaper options before getting a loan with a high interest rate. If you get a high-interest loan, know what to look for to ensure the loan helps more than it hurts.
What is a high-interest loan?
A high-interest loan has an annual percentage rate above 36%, the highest APR that most consumer advocates consider affordable. High-interest loans are offered by online and storefront lenders that promise fast funding and easy applications, sometimes without checking your credit.
» MORE: What are no-credit-check loans?
High-interest loans are usually a few thousand dollars or less. Some are short-term payday loans, but others are installment loans that you repay over a few weeks or months.
How high-interest loans are harmful
Consumer advocates say high APRs lead to large monthly payments that can be difficult to make on time. At high rates, the total interest cost can be more than double the amount borrowed.
If you can’t repay, a high-interest lender may offer to refinance your loan. This often means getting a new, larger loan or one with a longer term, leaving you paying more than you initially needed.
An installment loan with an APR below 36% may be a more affordable way to borrow money. These loans are often larger than high-interest loans, are repaid over years instead of months and have lower rates so you pay less to borrow the money. Lenders typically require a credit check to apply, but you can find installment loans for bad credit.
High-interest loan examples
Here are four lenders that provide high-interest loans, plus the monthly payment and total interest costs on a 12-month, $2,000 loan at the lender’s maximum APR. With a 36% APR, the monthly payment on that loan would be $201, and you’d pay $411 in interest.
How much interest is too much?
One way to tell whether a loan is too expensive is to look at the monthly payment. Small-loan payments should take up no more than 5% of your monthly income, according to the Pew Charitable Trusts. Add the loan payments into your monthly budget to see whether they fit. If it’s a tight squeeze, taking the loan may be a risky move.
Also, consider the total interest costs. Use an installment loan calculator to see how much you’d pay in interest alone. If that number is more than 50% of the amount you’re borrowing, the interest costs are inflated.
Finally, use the interest costs to measure how much the loan is worth to you. How much extra would you pay to borrow the money?
What to look for in a high-interest loan
If the only loan you qualify for has a high APR, look for a lender that:
Discloses the APR. By law, a lender must disclose the APR before you sign a loan agreement. You can use the APR to compare the full cost of one loan to another.
Checks your credit. Even if it’s just a soft pull, a lender that reviews your credit is making an effort to see whether you can repay the loan.
Has payments go toward principal. Monthly payments should pay down principal and interest. Interest-only payments don’t reduce the loan’s principal, so interest continues to accrue at the same rate. Check the loan’s amortization schedule before you agree to borrow.
Reports payments. The lender should report your monthly payments to at least one — but ideally all three — of the major credit bureaus. If your payments are on time, this reporting can help your credit.
Best high-interest loan alternatives
Borrowers with bad credit (a score below 630) or no credit may have cheaper alternatives to high-interest loans.
Alternatives for bad-credit borrowers
The lenders below cap APRs at 36% or lower and can lend to borrowers with low credit scores.
Upgrade personal loans can be as small as $1,000, and you get access to credit-building features, like free credit health insights. The lender also offers auto-secured loans, meaning you can use a vehicle as collateral to elevate your chances of qualifying or getting a lower rate.
Universal Credit loans, which are similar to those of Upgrade, take a couple of days to be approved and funded. You can get a rate discount for setting up automatic payments.
LendingPoint says it can send personal loan funds to your bank account the day after the application is approved. You can also make payments biweekly or monthly to fit with your pay cycle.
Credit unions can approve bad-credit borrowers by looking beyond a credit score to the whole financial picture, including an applicant’s relationship with the credit union. Federal credit unions cap APRs at 18%, and some offer small loans of a few hundred dollars. For example, First Tech personal loans start at $500, and Navy Federal loans start at $250.
Payday alternative loans are another small-dollar credit union offering. These loans can be $100 to $2,000, have repayment terms of a few months to a year and have maximum APRs of 28%. You don’t need a long membership to apply, either.
Alternatives for those with thin or no credit history
Lenders that cater to borrowers with thin or no credit history consider other information to qualify them, like cash flow and employment.
Upstart can approve borrowers with credit histories that are too thin to produce a credit score. The lender uses information such as where you live and work, where you went to college and whatever credit history is available to make a loan decision.
Oportun provides loans of $300 to $10,000 to borrowers with fair credit (630 to 689) or no credit. To qualify you, Oportun reviews income and expenses. You can add a co-signer or collateral to the loan to help your chances of qualifying.
Capital Good Fund is available in only a handful of states but offers low-rate loans to borrowers with no credit and those struggling to find work or meet other basic needs. The lender qualifies you using your bank account history. Loan amounts and APRs vary by state and purpose, but it could be your best option if you live in a state where Capital Good Fund lends.
» COMPARE: See your bad-credit loan options
Other borrowing alternatives
An informal agreement or nonborrowing alternative may be an interest-free solution in an emergency or financial hardship.
Family loans or money borrowed from someone you trust can help you bridge an income gap without a credit check. Draw up a contract that includes interest and a payment schedule so the terms are clear to both parties.
Payment plans are a useful way to split payments toward your utility bills, rent, credit cards or doctor’s office. Your utility company, mortgage lender and credit card issuer may have a formal application for payment deferral or hardship plans, but you may have to ask your doctor’s office or landlord directly.
Local charities and nonprofits may help you get clothing, food or transportation. These organizations can include food banks and religious organizations, and some can help you cover emergency expenses or utility bills.