How to Avoid High Interest Loans

high interest loan couple

There comes a time many of us may need to borrow, and the rates you would be eligible for are often tied to your credit history, score, debt to income ratio and other factors. Lenders try to avoid risk, and things like your credit score help them to review your application and decide whether they consider you to be too much risk as a borrower or approve your request.

High interest loans can be common for people with bad credit that might not qualify for other borrowing options with better rates. This type of loan might be an option when others are not, but the cost of borrowing is expensive and even become an issue. 

Many Canadians would not qualify for a bank loan. A recent survey (MNP) mentions that a third don’t earn enough to pay their bills, and near half are within a couple hundred dollars of insolvency. For some, all it would take might be one unexpected expense to create chaos and disrupt their budget. 

Avoiding High Interest Loans – Quick tips:

  • Explore your options for eligibility 
  • Improve ability to qualify if not too urgent 
  • Try alternatives to high interest loans 

The main method of determining whether you will be eligible for lower or higher interest rates is directly related to your credit score. If you have a credit score below 600 you definitely want to put an effort towards improving that. Maintaining a solid repayment history for any bills or debt goes a long way, but you can also look at how much debt you have as this is another consideration by lenders.

Read on to learn more about how you can avoid high interest loans and the possible ways you might be able to improve your credit and related matters that can help. 

Alternatives to High Interest Loans

Even if you don’t qualify for preferable rates for a loan due to bad credit, you can still find other options that might be more suitable. While this may depend on how quickly you might need the money, one of these alternatives to a high interest loan might be an option for you. 

Home Equity – If you own your home, borrowing against the equity built up can be an alternative to consider. Before doing so, you should be aware of the pros and cons, since your home would be collateral, and at risk if unable to make payments.

RELATED: Is a Home Equity Loan or HELOC a Bad Idea? 

Installment Loans – Most lenders look for a credit score near 600 or better as one of the minimum requirements for approval. If your need to borrow isn’t urgent and your score is close to this, it’s possible that you could improve your score to be eligible, which can be a better option than a high interest loan. An installment loan for bad credit is almost certain to be a better option than a payday loan if you can qualify and get approved.

RELATED: Choosing Between Installment Loans and Payday Loans 

Other options to high interest loans if the need isn’t urgent can include extra hours at work, side gigs, selling unwanted items, pawn shops and more. There’s always friends or family you can try to borrow from, and ways to make money online that might also be an option as well.

RELATED: How to Make Money Online

When The Alternatives Don’t Work

There are times when you don’t have the money in your account and borrowing is urgent. All kinds of unexpected expenses, emergencies or repairs can happen where you find yourself needing quick cash immediately. 

There are all kinds of situations where you may find that you simply need money now. In situations like this you may find e-transfer payday loans to be the fastest way of getting the funds needed. While they are high interest loans, this can also be a way to get the money in a few hours rather than days or even weeks.

For those where their income isn’t from employment but have an income from social assistance it may lead to a select few that can help, and sometimes these are high interest lenders. It really depends on the urgency as to whether this is an option to choose. 

RELATED: Getting a Loan With Bad Credit 

When looking for loans online you may come across options like personal loans guaranteed approval that suggest even with bad credit you can still borrow. While they aren’t truly guaranteed, they can be an option but are an example of high interest loans. You may also discover another that promotes itself as no credit check loans that would be similar since these too would be another example of high interest loans. There are also a variety of similar alternatives to be aware of, such as no employment verification, no refusal loans, no bank statements and more. It’s almost certain that all of these would be high interest loan offers that are presented in a way that might appeal to someone that needs money now. 

When considering loan options it is best to avoid high interest loans if at all possible, especially when it comes to payday loans. You might get the money fast to take care of a current problem, but these can lead to new issues to deal with. With most payday loans, the amount due (plus interest) is to be repaid on your next payday. This can be the start of a debt cycle for many, since a large amount needs to be repaid in a very short time. 

RELATED: Dealing With Debt, Lifestyle Inflation and FOMO

How to Avoid High Interest Loans in Future

The way to avoid high interest loans is either by having a savings or emergency fund available for when you need it, or improving your credit score so that you can apply for loans with better rates when needed. Your best option would be to do both, and even though neither will happen overnight, it is worth the time and effort in either case as it will benefit you later.

If you are left without a choice and must take a high interest loan, you should know that there are ways you can improve things to have better choices in future. 

Start by finding out your credit score if you don’t already know what it is, so that you have an idea of what you might need to work on so you can be eligible for something like an installment loan with better rates later. 

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Taking the time to educate yourself on credit scores, DTI, credit utilization and other aspects that affect your chances of being approved for a loan in the future can be beneficial. 

You may also be interested in how to save on bills, credit card debt, saving money and other topics found on GoodCheddar. Learning to manage your finances and improving your credit score can help for a brighter financial future.

Wizard of words, macchiato maven, soothsayer, naysayer, aspiring wordsmith and Head of Content Marketing at GoodCheddar.