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

A high-interest loan is one with an annual percentage rate above 36%. You may have cheaper options.
Oct 4, 2021

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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 do turn to 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 is one with 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.

High-interest loans are usually a few thousand dollars or less. Some are payday loans that require repayment on your next pay date, 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 and short repayment terms make these loans difficult to pay on time. Borrowers who can’t repay a high-interest loan may re-borrow to pay it off. This can be a difficult cycle to break.

For example, a three-month, $1,000 loan with a 170% APR would require monthly payments of $432 and about $296 in total interest. The same loan with a 36% APR would require monthly payments of $354 and about $61 in total interest.

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An installment loan with an APR below 36% may be a more affordable way to borrow money. These loans let you borrow the money all at once, then pay it back in fixed monthly payments over a period of months or years instead of weeks. You won’t need to put up collateral, and loan amounts tend to be higher, while interest rates are usually lower. Lenders typically require a credit check to apply, but you can find installment loans for bad credit.

High-interest loan alternatives

Borrowers with bad credit (a FICO score below 630) or no credit may have cheaper alternatives to high-interest installment or payday loans.

Alternatives for bad-credit borrowers

The lenders listed 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 borrowers get access to credit-building features, like free credit score monitoring. The lender also offers auto-secured loans, meaning you can use a vehicle as collateral to improve your chances of qualifying or getting a lower rate.

Universal Credit loans, which are similar to Upgrade, take a couple of days to be approved and funded. Borrowers can get a rate discount for setting up automatic payments.

LendingPoint says it can deposit personal loan funds into your account the day after the application is approved, a quick turnaround compared to other online lenders. 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. First Tech and Navy Federal personal 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 maximum APRs of 28%. You don’t need a long membership to apply, either. PALs aren’t as common as other options, but they’re available at hundreds of credit unions.

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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 you, like cash flow and employment.

Upstart can approve borrowers with credit histories that are too thin to produce a FICO 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 FICO) or no credit. To qualify you, Oportun reviews income, expenses and payments toward utility and cell phone bills. You can add a co-signer or collateral to the loan to improve 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.

What to look for in a high-interest loan

If the only loan you qualify for has a high APR, use an installment loan calculator to see how much your monthly payment will be.

A high APR doesn’t necessarily mean a loan will be unaffordable to you. U.S. Bank’s Simple Loan, for example, offers loans of $100 to $1,000 repaid over three months and charges $6 for every $100 borrowed.

To preserve your finances, 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 credit pull, a lender that reviews your credit is making an effort to see if you can repay the loan.

  • Offers fully amortizing loans. Monthly payments should pay down both 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 you make your payments on time, this reporting can improve your credit.

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