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What is Considered High-Interest Debt?
by
JG Wentworth
•
October 21, 2024
•
5 min
In the complex world of personal finance, few topics are as crucial to understand as high-interest debt. This type of debt can significantly impact your financial health, potentially trapping you in a cycle of ever-increasing balances. Let’s explore what constitutes high-interest debt, its various forms, and strategies to manage and overcome it.
What is high-interest debt?
High-interest debt refers to any borrowed money that carries a substantial interest rate, typically well above the average. While there’s no universally agreed-upon threshold for what constitutes “high” interest, generally, any debt with an Annual Percentage Rate (APR) in the double digits is considered high-interest.
Key factors in defining high-interest debt:
- Relative to market rates: What’s considered high interest can vary based on current market conditions. In a low-interest-rate environment, rates that might have been normal in the past could now be considered high.
- Type of debt: Different types of debt typically have different interest rate ranges. For example, mortgage rates are usually lower than credit card rates.
- Individual financial situation: For someone with excellent credit, a 10% interest rate might be high, while for someone with poor credit, it might be the best they can get.
- Purpose of the loan: Loans for riskier purposes (like unsecured personal loans) often have higher interest rates than secured loans (like mortgages).
Common types of high-interest debt
Credit card debt:
- Often the most prevalent form of high-interest debt.
- Average APRs range from 15% to 25% or higher.
- Interest compounds daily, making it particularly costly.
Payday loans
- Short-term loans with extremely high interest rates.
- APRs can reach 400% or more.
- Often trap borrowers in a cycle of debt.
Some personal loans
- Rates vary widely based on credit score and lender.
- Can range from 6% to 36% APR.
- Generally unsecured, leading to higher rates.
Store credit cards
- Often have higher rates than general-purpose credit cards.
- APRs frequently exceed 25%.
Subprime auto loans
- For borrowers with poor credit.
- Can have APRs of 20% or more.
Private student loans
- While not always high-interest, some private student loans can have rates in the double digits.
- Unlike federal loans, rates are based on creditworthiness.
Some mortgage products
While mortgages generally have lower rates, some products like adjustable-rate mortgages (ARMs) can become high-interest if rates rise significantly.
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The impact of high-interest debt
- Compound interest: High-interest debt often compounds frequently (daily for credit cards), meaning you pay interest on interest.
- Minimum payments trap: Making only minimum payments on high-interest debt can lead to years of repayment and significantly more paid in interest.
- Credit score impact: High credit card balances relative to your limits can negatively affect your credit score.
- Financial stress: The burden of high-interest debt can cause significant stress and impact overall well-being.
- Opportunity cost: Money spent on interest payments could be used for savings, investments, or other financial goals.
Strategies for managing high-interest debt
- Debt Avalanche Method: Focus on paying off the highest interest debt first while making minimum payments on others, which can be the cost-effective method in the long run.
- Debt Snowball Method: Focus on paying off the smallest balance first for psychological wins, which help build momentum and motivation.
- Balance transfer credit cards: Transfer high-interest balances to a card with a 0% introductory APR, just be aware of balance transfer fees and the regular APR after the intro period.
- Debt consolidation loans: Take out a lower-interest loan to pay off multiple high-interest debts, which can simplify payments and potentially lowers overall interest.
- Negotiate with creditors: Some creditors may be willing to lower your interest rate or settle for less than you owe.
Preventing high-interest debt
- Emergency fund: Build savings to avoid relying on high-interest credit for unexpected expenses.
- Budgeting: Create and stick to a budget to avoid overspending.
- Understand terms: Always read the fine print and understand the terms before taking on any debt.
- Use credit wisely: If you use credit cards, try to pay the full balance each month to avoid interest charges.
- Improve credit score: A better credit score can help you qualify for lower interest rates on future loans.
The bottom line
High-interest debt is a significant financial burden that can impede your progress towards financial stability and wealth building. By understanding what constitutes high-interest debt, recognizing its various forms, and implementing strategies to manage and avoid it, you can take control of your financial future. Remember, while high-interest debt can feel overwhelming, it’s not insurmountable. With a solid plan, disciplined approach, and perhaps some professional guidance, you can overcome high-interest debt and build a stronger financial foundation.There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
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The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 51% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
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