High-interest loans are defined as loans with an interest rate above 36%. This interest rate is calculated as an APR (Annual percentage rate), and these high-interest loans can become very expensive for borrowers who may be charged as much as 160% to pay back their loan – on top of the principal loan amount.
High-interest loans should only be considered when bad credit has ruled out other lower-interest-rate options like overdrafts, credit cards, and regular personal loans.
If you find yourself in a situation where you have no other option but a high-interest loan, there are a few ways to make sure it works for you.
Let’s take a look.
Understand the Rate & Repayment
When taking out any type of loan, it’s critical to understand the interest rate you are paying, the APR, and the total amount you will have to pay back.
- Interest rate – The cost of the loan to the borrower. This is expressed as an annual percentage.
- APR – The annual percentage rate is the cost of the loan to the borrower, including fees and other charges. It is also expressed as a percentage.
- Total repayment amount – This is what you will have to pay back either on a monthly, weekly, or a once-off lump sum amount.
If you are initiating a high-interest loan, it is essential that you first receive all of these figures, especially the total repayment amount, so that you can make an informed choice to proceed.
Furthermore, you should always try to get the lowest possible APR you can qualify for, which can save you money in the long run.
Choose the Right Lender
A surefire way to ensure that the loan process doesn’t work for you is to choose an unscrupulous lender, and unfortunately, there is no shortage of lenders looking to take advantage of unknowing individuals.
When evaluating lenders, consider the role of the following:
Some lenders use “no background check required” as a selling point for their high-interest loans. While it may seem appealing at first glance, a lender that offers a loan without understanding your salary and financial background may not have your best interests in mind. Background checks can provide essential information that helps lenders determine the affordability of a loan.
Repayment With Full Amortization
Loans that include full amortization allow principal debt and interest to be paid off with each repayment. The alternative is an interest-only payment, which takes more time and money to repay.
Most people choose high-interest loans due to poor credit scores. One of the best ways to improve your credit score is to make on-time payments for any loans you take out. When selecting a high-interest loan, be sure the lender has a policy of reporting your successful repayments to a credit bureau. Doing so will help improve your credit score and hopefully avoid high-interest loans in the future.
The best way to make a high-interest loan work for you is to be as disciplined as you can with the money you receive and to ensure that you prioritize its use. If you are using a high-interest loan to pay off debt, remember to prioritize the most urgent debt and work your way down the list.
Entertainment and things like expensive branded clothing or restaurant visits are not priorities. Alternatively, buying groceries, school fees, medical expenses, and basic clothing items would be essential. If you find yourself in a situation where you have to apply for a high-interest loan, remembering these points will help you make the best of a difficult situation.