High-interest Loan

A high-interest loan is a type of loan that comes with a significantly higher interest rate than traditional loans, often targeting borrowers who may have difficulty obtaining credit through regular channels.

Example #1

For example, a payday loan with an annual percentage rate (APR) of over 300% would be considered a high-interest loan.

Example #2

Another example is an online installment loan with an APR exceeding 50%.

Misuse

Misuse of high-interest loans can lead to a cycle of debt trap for borrowers. For instance, borrowers in urgent need of funds may take out a high-interest payday loan but struggle to repay it due to the exorbitant interest rates. This can result in continuous borrowing to cover existing debts, ultimately trapping individuals in a cycle of financial instability. It is crucial to protect against such misuse to prevent consumers from falling deeper into debt and financial distress.

Benefits

In some cases, high-interest loans can provide quick access to funds for individuals facing emergencies when traditional lenders may not approve their applications due to poor credit history. For example, a high-interest loan could help someone cover unexpected medical expenses or urgent car repairs when they have exhausted other options.

Conclusion

While high-interest loans can offer a quick solution for those in urgent need of funds, they also pose significant risks to consumers due to their exorbitant interest rates. It is important to educate consumers about the potential pitfalls of such loans and encourage exploring alternative borrowing options with lower interest rates and better terms to prevent falling into a cycle of debt.

Related Terms

LoanInterest RateCredit ScoreDebt-to-Income RatioCredit History