Struggling With High-Interest Loans? 8 Ways to Get Help

The high-interest loan industry is designed to keep you dependent upon its products for as long as possible. Most people who take out one wind up having to take out a second (or third, or fourth) to pay off the first. If this sounds familiar, try not to feel too bad. You are far from the first person to fall into the high-interest loan trap. In fact, 40% of young adults take out a payday or other type of high-interest loan at least once in their lives. 

Despite how you might feel right now, it is possible to climb out of the trap and get back on your financial feet.

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Common High-Interest Loans

A high-interest loan is more than just a loan with an interest rate that feels a little high — like when you’re offered 12% on an automobile loan instead of the 8% you were hoping for. 

High-interest loans have an extremely high interest rate. Think payday loans, tribal payday loans, title loans, and even, in some cases, credit card debt. The loans with interest rates that go into the 30% range or higher. In the case of payday and tribal loans, you can often wind up paying an interest rate that is between 100-600%.

8 Ways to Escape the High-Interest Loan Debt Trap

The reason these loans charge such high interest rates is that the goal of the lender is to keep you trapped in a cycle of lending. They want you to have to take out more loans. The more loans you take out, the more money they make off of you. In fact, more than 90% of payday loan borrowers end up regretting their original payday loan. Here are eight ways to thwart them and free yourself from their trap. 

1. Personal Loan or Debt Consolidation Loan

This might be your best option if you have a decent credit score and can get a personal loan with a reasonable interest rate. You can use a personal loan (sometimes these are called debt consolidation loans) to pay off your high-interest loans and consolidate them into a single debt. 

It is important to do your research here. Many personal and debt consolidation loan offers come with extremely high interest rates (the lower your credit score, the higher your rate). You don’t want to get caught in yet another trap! 

That’s the catch with this option: you have to be able to actually make payments on your loan. If you aren’t 100% sure you can afford that monthly payment, this is a very big risk. You might be better off with one of the other suggestions on this list.

2. Payday Alternative Loan

A Payday Alternative Loan (PAL) is a loan offered by many federal credit unions. It is meant to be a smaller, short-term loan. Most are capped at $1,000 and, at most, offer a twelve-month repayment period. These loans aren’t cheap—you can pay up to 28% interest. You also have to be a member of the credit union that offers the loan before you can apply.

However, 28% is way cheaper than the several hundred percent in the interest your payday lender is charging you! And, if you opt for a PAL II loan, you can apply for the loan as soon as you join the credit union. 

3. Balance Transfer Credit Card

Credit card refinancing via a balance transfer credit card works sort of like a debt consolidation loan. Instead of taking out a loan, you’ll open a line of credit. You’ll then use that credit to “pay off” other loans or credit cards, consolidating multiple debts into one. Typically, these cards have a grace period during which you’ll pay less (or no) interest on the balances you “transfer” to the card. These are a great way to save money.

Because these are credit cards, though, your credit history is going to matter a lot. You’ll need to have a decent score and solid history to qualify. 

You should also know that interest does accumulate during your grace period. The credit card company simply doesn’t charge you that interest until the grace period is over. If you can pay off the card completely during the grace period, you won’t have to worry about this. However, if you are still carrying a balance when the grace period ends, that accumulated interest will get tacked onto your balance due. Your new interest rate will apply to the total balance due — not just what you couldn’t pay off in time. 

4. Use an Existing Credit Card

If you have a credit card with room on it, use that to pay off your payday or tribal lender. Yes, credit cards can carry high interest rates. But even if your interest rate is 36%, that is much better than the hundreds of percent your payday lender charges. Isn’t that worth it to get out of the high-interest loan trap?

5. Mortgage Refinancing, Home Equity Loan or Line of Credit (HELOC)

This option can be your saving grace for people who own their homes (or who have built up a good amount of home equity while paying down their mortgages).

This is a good option because the associated interest rates are much lower than you would get with other loan products on this list. The catch is that the lower interest rate is usually offset by origination fees and closing costs. Also, mortgage rates are on the upswing, so It may not make sense to refinance a mortgage right now until rates fall.

Also? You are literally using your home as collateral to secure the loan. That means, if you default, the lender could seize your home as payment. Make sure you thoroughly evaluate all of your other options before choosing this one.

6. Debt Management Plan

Debt Management Plans (DMPs) are plans put together by debt/credit counselors. Here’s how they work:

Once you find a debt/credit counselor, that person will review your finances with you. They will help you identify each of your individual debts as well as the total amount you owe. Then, this person will contact each of your lenders and creditors on your behalf. Their goal will be to negotiate down your interest rates, the total amount due, etc. When those negotiations are complete, they will calculate your new total due. 

Your debt/credit counselor will use this new total and work with you to figure out a payment plan with a single monthly payment that you can actually afford to pay. You will pay that one payment to your debt/credit counselor every month. They, in turn, will distribute that payment across your debts until you have paid everything off. 

This option is best for people with multiple types of debt and large totals due. It can be a humbling process, but it is also one of the safer and most affordable options available.

7. Hire a Debt Settlement Company

Debt settlement is when you “settle” a debt for less than you actually owe. Creditors and lenders agree to these settlements because they would rather get something from you than nothing. 

You can negotiate these settlements yourself. However, the process can be time-consuming and overwhelming—especially if you aren’t confident in your negotiation skills.

If you don’t have the time, the skills, or simply don’t want to bother with the hassle of taking this on yourself, plenty of companies out there will be happy to take on the task for you…for a fee of course. Your best bet is to work with a non-profit debt settlement agency. Their fees will be much more reasonable. 

8. Bankruptcy

Welcome to your last resort. You can use bankruptcy to get rid of nearly all of your unsecured debt (with a few exceptions like past due taxes and student loans). 

You can try to handle your bankruptcy yourself, but the process will be much smoother if you work with an attorney. If you don’t think you can afford to hire an attorney, contact your local bar association. They’ll be able to help you find a lawyer who can take your case for a lower rate or, once in a while, even for free.

In addition, you’ll have to pay out some costs when you file. Though it won’t be free, there are a few steps you can take to try to reduce the cost.

The reason bankruptcy is your last resort is that it has a huge effect on your credit score and your report. Bankruptcy can stay on your report for up to 10 years (depending on the laws in your area), making it harder to obtain future credit, rent an apartment, etc. That said, if your situation is dire, it could provide you with the fresh start you seriously need.

Check out this breakdown to learn more about what happens after you file for bankruptcy:

How to deal with an existing payday loan

Payday loans are extremely high interest loans that are extremely easy for most people to get. They don’t run your credit. Instead, you’ll need to provide proof of regular income and your identity. If you are applying online, you’ll also have to give the company access to your banking information. 

If you can’t afford to pay off your payday loan immediately, you have two options:

  1. Request an extended payment plan. This is where the lender agrees to extend your repayment period in exchange for you paying more in fees, a higher interest rate, etc. 
  2. Negotiate with your lender, especially if your loan could be illegal. Several states have banned payday loans, capped interest rates, and imposed other regulations. Do your loan terms violate any of these regulations? If the lender won’t work with you, you can always file a complaint with the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), your state’s attorney general or other local regulators. 

The Bottom Line

There are lots of ways to get help with high interest loans. The options listed here are just some of them. You do not have to stay indebted to a high-interest lender forever, no matter how vehemently they may claim otherwise. 


What’s a Prepayment Penalty?

Prepayment penalties are fees that lenders sometimes charge borrowers who pay their loans off sooner than originally agreed upon. They are common with mortgages. 

How is a Credit Score Calculated?

Credit bureaus weigh five criteria to determine your credit score:
1. Payment history
2. Total debt owed
3. Length of your credit history
4. Number of credit applications you’ve submitted
5. Types of credit used
These criteria are plugged into a proprietary algorithm that determines your score.

What Happens if I Default on a High-Interest Loan?
You won’t go to jail for failing to pay a loan. However, you could get a court summons. If that happens, it’s important that you appear in court.

If the lender reports your missed payments to the credit bureaus, so your credit score will tank. Even if they don’t report the late payments, they could sell your debt to a company that does. Debt collection agents are notoriously scammy and notorious for their harassing collection techniques. It’s better not to take the risk. 

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