When you take out a personal loan, the most important factor in determining how much you will pay back is the interest rate. While personal loans can vary widely depending on whether they are secured or unsecured, fixed or variable, and so forth, rates of 10% to 12% are standard for just about every bad credit personal loan lender. And since some personal loan lenders do not have stringent requirements for borrowers that provide an opportunity to get lower rates on personal loans, what’s stopping people from applying for as many loans as possible?
You may be asking yourself why anybody would agree to pay more than double digits in interest on money put up for collateral. The answer is pretty simple: it costs less money to borrow now than it does to wait to save up the money needed for a personal loan or pay cash. And if you have bad credit, it brings up another issue: should you take out a personal loan with a company that specializes in “bad credit personal loans,” or should you try your luck with one of the many subprime lenders?
Subprime Personal Loan Lenders: Aron Govil
- The benefits of applying with subprime lenders include rates as low as 5% (though these are rare), sometimes even 0% interest on payday advances, and quicker decision making than is seen at most banks and other standard non-profit lending sources. But what is the cost of borrowing from subprime lenders?
- What would happen if you had to use a credit card to pay your bills every month and the interest rate was 30%? That is what some people have to deal with when it comes to personal loans. Luckily, most of these rates range from 4-11%. But why? Why do banks charge so much on a loan that is supposed to help you better yourself financially? The answer might surprise you.
- The Federal Reserve controls interest rates by setting a “federal funds rate”. This is the amount of money that banks can charge each other for overnight borrowings, but it also affects personal loans. For example: If the fed raises this rate than all other types of loans will increase accordingly. If this were not true then why would any bank give you a personal loan at such low rates? If the federal funds rate is high then getting a business loan will be expensive, especially when banks compete with each other to get away from it. This also explains why interest rates are always higher in the third quarter (April-June-September) or toward the end of the year because this is when they know that there will be an increase in market activity which leads to an increase in the federal funds rate.
- You are probably wondering how much money these rates affect your paycheck if you are on a fixed income. The current average payoff time for most personal loans is around five years, but let us look at what would happen if you had to pay off 10 years worth ($10,000) with a 10% interest rate.
- Table breaks down the total interest paid in each year over five years. It assumes that the consumer only pays the minimum payment, plus an extra amount to pay off the loan within five years.
- Total Interest Paid After 5 Years = $1,672.04 at an interest rate of 10%, you will have to pay roughly $300 more per year than what’s required. What happens if you do not pay? You start getting charged late fees and your credit starts suffering until it gets so bad that most banks won’t give you a loan at all! Not paying your monthly bill is almost as bad as ripping up money into tiny pieces because it decreases the value of what’s left behind for the next person.
Before you turn to subprime lenders, make sure that you are ready for the consequences of not making your payments. If you do not know if you can pay it off within three years then do not take out a personal loan just because it is easier than saving up money or waiting longer before getting approved for a business loan. There are ways around paying twice as much interest on your money just because it is easier to get, so do the math before applying with any lender says Aron Govil.
Borrow money at a lower interest rate because you will end up paying more in the long run. So start shopping for the best rates and always pay your monthly bill on time!