When you need cash, you may be tempted to go with the option that gets you money the fastest, but sometimes, this can be a costly mistake. You have many options when it comes to borrowing money. Each has its own terms, interest rates, and qualification requirements.
When you need to borrow money, it’s tempting to just take whatever loan you can get approved for as quickly as possible. But not all loans are created equal, and some can end up being far more expensive than others. So where exactly do the most expensive loans usually come from?
Finance Companies Offer Loans at High Rates
Finance companies that specialize in lending money directly to consumers typically charge very high interest rates and fees. This makes the loans they offer among the most costly.
Finance companies like OneMain Financial and Avant focus on lending to borrowers with lower credit scores who may not qualify for loans from mainstream banks and credit unions. To compensate for the increased risk these lenders charge higher rates.
Annual percentage rates (APRs) on personal loans from finance companies often range from 35% to 199% or more. By comparison, the average rate on a personal loan from a bank is around 10% APR for those with good credit, according to research from Bankrate.
The same is true for other types of consumer loans offered by finance companies, including auto loans and small business loans. You’ll pay a premium for the convenience of fast financing and lenient approval requirements.
Retail Credit Cards Carry High Rates Too
Department store credit cards and other retail cards are another source of very expensive loan financing
Store cards tend to have APRs of 25% or more in many cases. Cards from big box stores like Lowe’s and Home Depot are around 26% typically. Meanwhile, a Macy’s or Best Buy card may charge APRs of 27% or higher.
These cards allow you to finance purchases interest-free if paid off within a short promotional timeframe, usually 6 to 24 months. But if you carry a balance beyond the promo period, high deferred interest kicks in.
This makes retail cards best for limited use on short-term financing. The high regular rates make them expensive for ongoing revolving balances.
Beware of Predatory Payday and Title Loans
You’ll also want to avoid payday loans that allow you to borrow against your next paycheck. These loans charge excessively high fees equating to APRs in the triple digits.
For example, a $500 payday loan repaid in two weeks with a $75 fee has an APR of nearly 400%. And title loans that use your car as collateral also come with APRs averaging around 300%.
The difficulty in repaying these expensive loans means borrowers often roll them over or reborrow. This can trap you in a cycle of debt that’s tough to escape.
Credit Cards Aren’t the Most Cost-Effective Either
Finally, while not always the absolute most expensive, credit cards are another source of costly loan financing in general. The average credit card interest rate currently sits around 16% to 17% APR.
However, those with lower credit scores may pay rates of 25% or more in some cases. And deferred interest promotions on credit card purchases can lead to high retroactive interest if not fully repaid on time.
This makes credit cards best reserved for short-term financing and emergency use in small amounts. For large, long-term loans, other sources tend to provide more affordable options.
Focus on Total Costs, Not Just Interest Rates
When evaluating loans, you need to look at the total costs, not just the interest rate. Lenders may charge high origination fees or prepayment penalties that drive up the true cost of borrowing.
For example, a $10,000 personal loan at 5% APR with a $500 origination fee actually equals over 7% in total costs once the fee gets factored in.
Run the numbers on any loan you’re considering to determine the real expense both in interest charges and fees. Online loan calculators can help with this.
Shop Around for the Best Rates Available to You
The interest rates and fees lenders charge depend heavily on your credit score and financial profile. So shopping around is crucial to get the lowest cost loan for your situation.
Those with good credit scores of 670 and higher should compare rates from multiple banks, credit unions, and online lenders when borrowing. With very good credit of 740-plus, you may qualify for rates under 5% from some lenders.
For bad credit borrowers, secured loans requiring collateral like a savings account or auto title may provide cheaper alternatives to unsecured financing. Federal student loans for education costs also tend to offer reasonable rates to those who qualify.
And if you’re looking to refinance existing debts at lower rates, focus on lenders specializing in debt consolidation and refinancing.
Weigh the Tradeoffs of Lower Rates vs. Convenience
In some cases, you may opt for a loan with a higher rate or fees because it offers faster access to funds or greater convenience.
Online lenders like SoFi and Lightstream make getting a loan incredibly fast and easy but may not always have the absolute lowest rates. Meanwhile, retail credit cards provide point-of-sale financing not available with bank loans.
Just be sure to run the numbers and enter any expensive credit agreement with eyes wide open. Know exactly what the additional costs will be for any added speed or convenience you receive.
Explore Alternatives Before Resorting to Costly Loans
Taking out expensive loan financing should be a last resort. Before you commit, look into alternatives that may allow you to avoid borrowed money altogether.
For example, you may be able to pay existing debts off faster through a debt management plan with a credit counseling agency. This can lower interest rates and fees on what you already owe.
If you need cash to cover an emergency, consider borrowing from family or friends or using crowdfunding sites. Or pick up a side gig delivering food or driving for a rideshare service for short-term cash.
The more effort you put into finding other workable options first, the less likely you’ll need to resort to a punishing high-rate loan.
Just remember, when you do need to borrow, watch out for finance companies, retail credit cards, payday/title loans, and excessive credit card debt. Carefully compare all loan costs, not just interest rates. And explore alternatives before taking the plunge into expensive financing that could take years to pay back.
Line of Credit
A line of credit is typically offered by lenders such as banks or credit unions, and, if you qualify, you can draw on it up to a maximum amount for a set period of time. You’ll pay interest only when you borrow on the line of credit. Once you pay back borrowed funds, that amount is again available for you to borrow. Flexibility is the key here: You can choose when to take out the money, pay it back and repeat as long as you stick to the terms, including paying off what you borrow on time and in full.
If you know you can’t afford payments or your income is unstable, a line of credit might not be a good choice. If you default on payments, your credit will most likely suffer. What’s more, on a secured line of credit, the lender may take possession of the collateral.
If you know exactly how much you need and you don’t want to use collateral, you may be able to find an unsecured personal loan with better rates than an unsecured line of credit, depending on your creditworthiness. If you’re using the line of credit for basic needs, or to fund short-term expenses like dining out and vacations, that could be a red flag that you’re struggling financially and shouldn’t take out new debt.
Avoid these 3 Expensive Borrowing Options
Payday loans are popular among individuals with poor credit because they give you cash quickly and they don’t usually require a credit check. The problem is that the interest rates are astronomically high — in some cases, more than 500%. Plus, the loan terms are only for a couple of weeks, so you don’t have much time before you need to pay back an amount that’s much more than you originally borrowed.
Let’s understand how payday loans work with an example. Let’s assume that you are in need of ₹ 40,000 which is for an emergency, but you are still thirty days away from payday, and your bank account is sadly on the verge of being empty.
You go to one of the several online payday lenders who offer you convenient payday loans. As you expect your salary within seven days, you apply for a loan for tenure of seven days and for a principal amount of ₹ 40,000 at 9 % interest per month.
So, ₹ 40,000 (Amount borrowed) + ₹ 3600 (Interest) = ₹ 43,600 to be repaid within 7 days.
Essentially, if you have to take a 30-day loan, you are paying 108 % interest. If you take a 60-day loan, you are paying 108% interest. And in case you are late, you are likely to pay penalties on a per day basis
Typical interest rate: 15.05%. People with good or better credit, typically a minimum of 670 for a 0% APR credit card
Credit cards are a notoriously expensive way to borrow money. If you don’t pay off your balance every month, the high interest rate means borrowing that money gets expensive, fast. So if you’re considering putting your expenses on a credit card and know you can’t pay them off immediately, you might want a credit card with an introductory 0% APR.
These 0% APR cards give you a period of interest-free credit, generally between nine and 21 months, depending on the card. If you pay off your balance in full before the 0% interest rate expires, it could mean free borrowing. These cards are often referred to as balance transfer cards, because you can move your balance from another card (for a fee) to take advantage of the introductory rate. It’s a good option to cover small bills and purchases for anyone who’s confident they can pay back the funds quickly.
However, note that after the introductory period ends, the card will apply a regular (read: high) interest rate to the existing balance. If you aren’t going to pay off your balance in time, it might not be the best borrowing method for you.
Which types of loans usually cost the most?
FAQ
What is the source of the least expensive loan?
Which type of loan interest rate is highest?
Where can you often obtain medium priced loans from?
Which personal loans are the best?
Our picks for the best personal loans are: LightStream: Best for home improvement loans, SoFi: Best for good to excellent credit, Upgrade: Best for bad to fair credit, Upstart: Best for short credit history, Happy Money: Best for credit card consolidation, Discover: Best for debt consolidation, Best Egg: Best for secured loans.
What are the different types of personal loans?
Personal loans come in several types: unsecured and secured loans, debt consolidation loans, and personal lines of credit. Unsecured personal loans are the most common and don’t require collateral. Secured personal loans, on the other hand, require collateral and usually offer lower interest rates.
What is the best personal loan interest rate?
Given that the average personal loan APRs are slightly above 10% and the average credit card interest rate is nearly 20%, the best personal loan interest rates would be below 10%. The average rate of return in the stock market tends to be around 10% when adjusted for inflation.
What are the best small personal loans?
Patelco also offers the widest range of loan amounts of any lender on our list. You can borrow as little as $300 — most lenders have minimum loan amounts of $1,000 or more — or as much as $100,000. That’s why Patelco ranked first on our list of the best small personal loans.