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A personal loan with a higher interest rate is one that charges close to the maximum annual percentage rate (APR) limit set by your state. This type of loan can be expensive but can help applicants with lower credit scores qualify for financing.
Find out how high-interest-rate personal loans work and how to avoid potential red flags from lenders.
Key Points
• Credit score, income, debt-to-income ratio, loan term, and loan amount all affect personal loan interest rates.
• Shopping around for multiple loan offers may help you secure a lower interest rate.
• Requesting quotes with only soft credit inquiries prevents score damage.
• Improving financial health, such as by reducing debt, can lead to better loan terms.
• Comparing lenders and their requirements can uncover more favorable interest rates.
Understanding Personal Loan Interest Rates
When you apply for a personal loan, you’ll see an interest rate quote as part of your offer. You’ll also see the annual percentage rate (APR) vs. interest rate — the APR is usually a little higher because it considers the cost of lender fees as part of the percentage. The higher your rate, the more interest you’re charged over the life of the loan.
The interest rate is applied to your loan balance throughout the entire repayment term. Every time you make a scheduled payment, the payment is split up between principal and interest. You can use a personal loan calculator to figure out how much different interest rates will cost over time.
Many personal loans come with a fixed rate, meaning the rate doesn’t change over time. If you choose a type of financing with a variable rate instead of fixed, that means the interest rate can change, potentially causing your payment to increase.
What Is Considered a High Interest Rate?
Wondering what’s considered a high interest rate on a loan? The maximum limit for high-interest loans is regulated by individual states., There may be different rate caps based on the size of the loan and the length of the loan term.
Here’s an overview of the median state APR limit by loan size and term:
| Loan amount and term | Median state APR limit |
|---|---|
| $500 / six-month loan | 39.50% |
| $2,000 / two-year loan | 35.50% |
| $10,000 / five-year loan | 27.00% |
As you start exploring personal loans, be careful of interest rates at these levels or higher. It’s also important to watch for the states that don’t have rate caps.
Recommended: APY vs. Interest Rate
Factors Influencing Personal Loan Interest Rates
When applying for a personal loan, there are five factors that impact your eligibility as well as your interest rate. Understanding each category gives you a better sense of whether you’ll need a high-interest-rate loan in order to qualify.
• Credit score: Having a lower credit score usually means you’ll pay a higher interest rate on any type of financing, including personal loans. Credit scores range from 300-850, and anything 670 or above is considered good. If your score is lower than that, you may have trouble qualifying for a good interest rate.
• Income: Your lender may require a minimum income in order to qualify. On top of that, earning more can help you get a better interest rate because you may be more likely to make your monthly payments on time.
• Debt-to-income ratio (DTI): Your DTI compares how much debt you pay each month and how much income you bring in before taxes. With a high percentage of your monthly income going toward existing debt, you may not be able to borrow as much. Similarly, you may also have to pay a higher interest rate.
• Loan term: Longer loan terms usually come with higher rates because there’s more of a chance that your financial situation will change. Getting a personal loan with a shorter term could help lower the total interest paid.
• Loan amount: A larger loan usually causes rates to rise since the lender takes on more risk with a larger loan amount.
💡 Quick Tip: Not sure what certain loan terms mean? Check out the Personal Loans Glossary for a simple guide to the basics.
Identifying High-Interest Personal Loans
High-interest personal loans can be expensive and even predatory. Do your due diligence by comparing at least a few different loan offers to make sure your terms are normal for your credit profile.
Also, look for red flags that could indicate predatory lending practices, such as lenders that advertise no credit checks or employ high-pressure sales tactics. Carefully review the contract terms and look for any conflicting information or expensive fees. You can also check your state attorney general’s website to make sure a lender is licensed to do business where you live.
While there are reputable high-interest personal loans out there, make sure you’re finding the right ones with competitive financing terms.
Recommended: What Is a Personal Loan?
Consequences of High-Interest Personal Loans
Taking out a high-interest personal loan can affect both your short-term and long-term financial health. Pay attention to the following three areas when considering whether or not this type of loan is right for you.
Monthly Budget
Make sure the principal and interest payments for your personal loan work with your budget. Overstretching yourself can hinder your other financial goals. And if you don’t have much of an emergency fund, any change in your circumstances could make it difficult to stay on top of your loan payments.
Total Cost of Borrowing
Calculate how much a high-interest personal loan will cost you from start to finish. Include interest as well as lender fees.
Potential Debt Cycle
Some lenders may offer to refinance your loan if you have trouble making payments. But what they’re really doing is extending the repayment term to keep you paying interest for longer.
Alternatives to High-Interest Personal Loans
Before you take out a high-interest personal loan, consider some other options first.
• Credit unions: These community-based financial institutions may have more flexible lending criteria, especially if you’re a member.
• Peer-to-peer (P2P) lending: P2P lenders used to connect individual investors with borrowers, but now, many of them work with institutional investors, such as banks. Still, you may find different financing terms with this type of loan.
• Secured loans: A secured loan uses some type of collateral that the lender can take if you default on your payments.
• Balance transfer credit cards: If you plan to use a personal loan to consolidate debt, you may find a balance transfer card with an introductory interest rate. You can transfer existing balances to one card and try to aggressively pay off your balance with the introductory APR.
Factors That Can Lower Interest Rates
Taking some time to search for lower interest rates can help you save money on a high-interest personal loan. If you don’t need the money right away, check your credit report and work on the issues that are hurting your score.
Also, shop around for multiple loan offers. Request quotes that only do a soft inquiry on your credit score so you don’t cause any damage. Finally, consider asking a trusted friend or family member to be a cosigner on the loan.
The Takeaway
Do personal loans have high interest rates? Some can, especially if you have a lower credit score and large existing debt balances. That said, a higher credit score and less debt could help you qualify for better rates and terms. SoFi, for instance, offers personal loans with competitive interest rates for individuals with strong credit profiles.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What’s the difference between APR and interest rate?
A loan’s annual percentage rate (APR) includes additional costs, such as origination fees, as part of the interest rate calculation. In contrast, the interest rate itself only applies to the percentage charged based on your principal balance.
Can I refinance a high-interest personal loan?
Yes, you can refinance a high-interest personal loan by taking out another loan and paying off your balance. Then you would start making new payments with the updated loan terms.
Are online lenders more likely to offer high-interest loans?
It depends. Online lenders tend to have fewer operating expenses since they don’t have brick-and-mortar branches like traditional banks do. But they also may have more flexible lending requirements, which could mean higher rates for borrowers with bad credit.
How do personal loan interest rates compare to credit card rates?
A personal loan interest rate is usually fixed, while credit card rates are variable. Loans may come with lower rates, as well, but it’s not guaranteed, especially if you have a lower credit score.
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