Need quick cash? Beware high-interest lenders like American Web Loan

High-interest lenders offer quick cash with few credit restrictions, but they can lead to more trouble than they're worth

Brian Acton

By 

Brian Acton

Brian Acton

Contributing Reporter

Brian Acton is a contributing reporter at Policygenius, where he covers personal finance and insurance news. His work has also appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, and HuffPost. 

Published February 24, 2022 | 4 min read

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In 2021, only 64% of Americans could cover a $400 expense with cash or its equivalent. Anyone who really needs cash when an urgent expense arises can probably see the appeal of high-interest lenders, who capitalize on that urgency by offering quick loans without strict credit requirements. 

One such lender is American Web Loan, which has extended more than $1 billion in loans to more than 600,000 people in the United States. But according to a federal class action lawsuit filed in 2017, the average interest rate for its loans was a whopping 560%. By comparison, credit cards generally range from 12% to 30% interest. Before you turn to a high-interest lender to get you through a tough financial spot, it’s important to understand how these types of loans can get you into further trouble. 

The appeal (and drawbacks) of high-interest lenders

High-interest loans, such as payday loans, are appealing because they promise quick cash to people when they need it the most — such as when a car breaks down or an unexpected medical bill arrives, says Ryan Firth, certified public accountant and president at Mercer Street, a financial planning firm. These types of short-term emergencies feature in customer stories on the American Web Loan website. 

These lenders are also popular because they’re quick and convenient. According to American Web Loans’ website, applicants can find out if they’re approved for installment loans of up to $2,500 within moments of submitting an online application. Credit requirements for high-interest loans also aren’t as strict, and borrowers with bad credit or limited credit history may be able to qualify. 

“High-interest loans are most often used by people who have slightly tarnished credit, or who are unable to qualify for low-interest financing,” says Jonathan Svensson, co-founder of financial website Almvest

But quick access to cash can cost you in the long run if the interest is high enough. The sky-high interest rates referenced in the American Web Loans lawsuit are illegal in many states, but the company says that because it is owned by the Otoe-Missouria Native tribe, it’s governed by tribal law and its sovereign status protects it from civil suits (that lawsuit has since been settled for $86 million and cancellation of certain loans). American Web Loans did not respond to requests seeking comment. 

Consumer advocates generally say that interest rates exceeding 36% hinder borrowers’ ability to repay. Especially for borrowers with limited funds, it can be difficult to make a dent in the principal of the loan when the interest rates are so high. 

“The interest rate can be usurious” and can trap borrowers in an endless debt spiral, Firth says. Even if you manage to make the payments and pay off the loan, you will pay an excessive amount of interest to do so. 

“If you end up having to use them for longer periods of time, then the interest rates attached to these loans will likely start racking up and snowballing into unmanageable debt that could take years (or even decades) to repay,” Svensson says. 

→ Here are 50 ways to pay off debt

How to avoid predatory high-interest loans

Before you start applying for loans, carefully evaluate the lenders you’re looking at. If a lender isn’t upfront about the range of interest rates it offers, this is a major red flag (American Web Loan won’t disclose any information about interest rate ranges until after you’ve submitted your application online). Also be sure to review the repayment terms, including how long you have to pay off the loan, the payment amount, and how often payments are due. 

When in doubt, research the lender’s reputation. You can check with the Better Business Bureau and the Consumer Financial Bureau’s complaint database for complaints about the lender. This isn’t a foolproof solution, but numerous negative complaints about a lender could be a warning sign. 

Before you turn to high-interest loans, look for alternatives. You may be able to qualify for a personal loan from a bank or credit union. Some institutions can work with borrowers with poor or limited credit by reviewing their overall financial picture, including income.

If you’re trying to build your credit score, high-interest loans are a bad idea because the interest rates make them difficult to repay. Instead, take a look at options designed around building credit, like secured loans or secured credit cards, which require an upfront deposit but can help you build positive payment history. 

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