What are interest rates?
An interest rate is an amount charged by a lender when he or she lends money, whether the bank loan is to an individual or to a business. Interest rates fluctuate according to, among other things, economic conditions, supply and demand, and the prime rate, which is set by the Federal Reserve.
Typically, the interest rates charged to businesses are, for example, “prime plus one” or “prime plus three.” This means that the lender is charging the borrower the prime rate plus 1 percent, or the prime rate plus 3 percent, and so forth.
Where do interest rates come from?
The prime rate is set by the Federal Reserve and that rate sets the minimum interest rate that can be charged for commercial loans. The interest rates for low interest personal loans, small business loans, and mortgages are affected by the prime rate. Lending institutions set the interest rates that they will charge for their loans; although there are laws governing usury, which means charging exorbitant interest rates, lending institutions are allowed to set the rates they will charge consumers.
What does qualified borrower mean?
When a bank or other lending institution makes a loan, they want to ensure that the funds are repaid timely, so they establish criteria to determine the borrowers who are likely to repay their loans. The term for this is a qualified borrower. Typically credit score, annual income, and job time are a few important qualifications lenders will use to determine worthiness.
Who are qualified borrowers?
Qualified borrowers are individuals who, in the past, have exhibited their abilities to repay their bank loans timely and live within their means. Factors taken into consideration include:
·Debt to income ratio
·Credit card balances
·Late payments
·Bankruptcies
·Length of credit history
·Number of recent credit inquiries
What are some qualifications for low interest personal loans?
A good credit score is one of the most important factors in obtaining a low interest loan, whether it is a secured loan or a personal loan. Those with no credit history or a bad credit score will likely find it difficult to obtain low interest loans. Gainful, consistent employment is another qualification for obtaining low personal loan interest rates. Even with a good credit score, lack of employment may prevent potential borrowers from obtaining low interest loans. Similar to high interest loans for qualified borrowers who may not have the best credit history.
Why are interest rates a little higher for personal loans than for loans with collateral?
Unsecured loans, payday loans, anything which is not back with a pledged assets, also known as personal loans, typically charge higher interest rates because there is no collateral. In other words, if the borrower fails to repay the loan, the lender has no collateral to compensate for the remaining funds due. A personal loan is sometimes called a signature loan because there is no collateral; funds are issued on the borrower’s signature stating that he or she will repay the loan. Particularly for those with less-than-perfect credit scores, a lender may charge a substantially higher interest rate because there is a higher risk of the loan not being repaid.
What are some of the benefits to paying higher interest rates for this loan?
One of the primary benefits to personal loans rather than collateralized loans is that the collateral is not encumbered. For instance, the collateral on a mortgage is the building and/or land, and the building and/or land cannot be sold without first paying off the mortgage. Personal loans may help build credit or consolidate credit card debt at a lower rate than the credit card companies charge. Be careful, though, not to run up additional credit card debt when the balances are consolidated. Those with less-than-perfect credit can use a higher-interest personal loan for necessities, such as a car, that might otherwise be out of reach.
Personal private loans are available from traditional lenders as well as online lenders. Many peer-to-peer lenders process loans online, which is a very convenient service. Peer-to-peer lenders are private individuals who loan money and often, their criteria for lending are more flexible than those of traditional lenders. Diligence and prudence when shopping for a personal loan will yield the most satisfactory results.
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