Why do consumer loan interest rates vary from institution to institution?
Why do the interest rates of consumer loans vary from one institution to another? Aside from the reasons related to legislative permissions that allow different institutions to charge different rates for small loans, there are other considerations. Management fees tend to vary greatly between lending institutions. For a small business loan, for example, administration fees tend to be quite high. This is because many of their loans are small in dollars. And it costs just as much to service a $200 or $300 loan as it does for a $2,000 or $3,000 loan. In addition, small loan companies also make loans to people who have poorer credit risks. Because of this increased risk, they charge higher interest rates. The management costs of credit unions are very low. Because they are mutual organizations, they have very little overhead; their employers often give them office space without paying rent. Their loss history is very low and they are given a tax advantage over commercial banks.
There is no risk of loss to the insurance company in making a policy loan, and your cost of collection is very low because these loans are single-payment loans that, in many cases, are never repaid.
Commercial banks, generally speaking, make loans only to the best credit risks. Due to this circumstance, its history of losses is very low, a fact that reflects its interest collection. Savings and loan associations also accept only the best risks. Therefore, their rates are often below those of finance companies and comparable to those of commercial banks.
Industrial banks, on the other hand, accept more risk and charge higher rates than commercial banks. In addition, industrial banks make extremely small loans, from $50 to $100 and even less, resulting in a high administrative cost per dollar lent.
As a general rule, when borrowing money, you should first try your commercial bank, your credit union, or if you want, your insurance company. They generally charge less than other lending institutions. You should also be aware that the maximum interest rate allowed on small loans (consumer loans) is higher than the rate allowed by general usury laws. There are basically three reasons for this difference in interest rates:
1. Typically, the cost of a credit investigation is more per dollar borrowed. It takes just as long to run a credit check and determine the creditworthiness of a person who borrows $100 or $1,000 as it does for a person who borrows $10,000 or $20,000.
2. Bookkeeping and record keeping costs are higher on a small loan than on a larger loan, per dollar borrowed.
3. There is often more risk for the lender due to the credit rating of many of the people who borrow from small loan companies. Because of the increased risk of default, the lender insists on a higher interest rate as compensation for taking on the increased risk.
However, this third point, high risk, is not always present, so if your credit rating is good, it is ridiculous to pay more than 12 percent on consumer credit. Certain lending institutions, such as commercial banks, will lend only to those with strong credit ratings, so they take on a relatively small amount of risk. Personal finance companies will lend to those with low credit scores; They take more risks and charge higher interest rates. While most interest charges, even ones that go as high as 30 or 40 percent, are perfectly legal, there are some lenders who break the law and are illegal “loan sharks.”
Small loan laws are intended to protect both the borrower and the lender. The lender is allowed to charge higher rates to compensate you for credit research, accounting, and risk. The borrower receives some protection because, although he pays what can be a relatively high rate in some cases, there is a cap on the rate he must pay. can be charged. If it weren’t for the legal cap, he could fall into the hands of an unscrupulous lender who could charge him even more. The unsuspecting consumer should be aware that when money has been slow at a usurious rate, most states provide for forfeiture of principal or interest or both.
