- May 22, 2020
LET’S UNDERSTAND LOAN INTEREST RATES FROM A DIFFERENT PERSPECTIVE
The instances of the young and old marred by complex monetary situations are rising higher day by day. This 2019 Covid crisis has stalled significant economic progress.
Primary offices and work establishments are closed or are functioning in the format of work from home. The major cash crunch is faced by daily wage earners who have lost their employment source altogether.
To even meet their essential needs, they are resorting to savings. Savings have also become so dry that taking some kind loan or credit card becomes necessary.
Especially the millennial, the significant percentage of the youths are taking various short term and long term credits.
But the overall knowledge about every element of a loan transaction is meagre.
Your Knowledge Needs More Explanation
Knowing about interest rates, repayment options, and other things in a loan agreement will not land a borrower in deep financial trouble. Various things impact the level of interest rates.
As these rates always change from time to understanding the reasons for the same is vital. The overall micro and macroeconomic condition of the economy has a direct impact on interest rates.
If the economy is in a recessionary mode, then the interest rates offered are less as the Government wants to increase the circulation of money.
Vice versa is the case when the economy is in a bullish run wherein its situation is good, and the inflation levels are high. High inflation levels prompt the raising of interest rates by the lenders as the currency flow is to be kept under check.
Besides these two determinants, another crucial aspect also, which makes the interest rate expensive or not, is the borrower’s creditworthiness.
If the person borrowing money has a shallow credit score as his records have several past loan defaults, the lenders raise the rate of interest or APR.
The risk taken by the lenders is substantial as they don’t have the assurance of timely future repayments, so they demand a price for this risk.
Life is uncertain, and money crises always lurk around the corner.
Many emergencies happen to like one’s vehicle breaks down, and its repairs will cost much or even funds for higher education is required.
Numerous are the urgent needs for money for which one can take installment loans for bad credit.
Affordable are these loan repayment modules as they are decided based on the financial capacity of borrowers only.
Even the aspect of a person not able to gather loan due to his bad credit history is taken with a kind eye. The loan products given by online lenders offer the best deals most competitively.
APR or Annual percentage rate
The annual percentage rate is the rate of interest charged by banks from the borrowers. This percentage is inclusive of the following bank charges like:
- Closing fees
- Discount points
- Broker fees
- Upfront fees
It is the main reason that different lenders charge their versions of APR. Some charge upfront fees for the loan contracts while others don’t.
So, a person must negotiate and decide well before affirming a particular loan transaction. Further, APR is popular as it serves as a valuable tool for comparison.
Borrowers and other people find it quite easy to compare in terms of representative APR mentioned on the lender’s website. It enables them to calculate the entire cost of the loan inclusive of various charges.
They are thus making it easy for them to gain the best loan deals.
Another value-added aspect of APRs is that they should always be greater than or equal to the nominal interest rate and never otherwise.
Interest rate discussed here is simple interest and not compound interest. Regulations of the FCA also stipulate APR calculations based on simple interest rates only.
So choosing to follow any other rate would assume that it is not simple interest and thus expensive.
Another name for this APR is EAR which is the effective annual rate used by the credit card issuing companies.
APY or Annual percentage yield
Another noteworthy rate is also present, which uses compound interest as its base rate.
It is the Annual percentage yield.
The fact that the lenders across England and in other places this is not mentioned at all is because the regulatory regime does not permit it.
Compound rates can never be used as the base rate for loan interest calculations due to its various deficiencies.
12-month loans for bad credit, is one of the best options for people struggling to gain funds as they have less than average credit score.
The past track records of their loan repayments do not permit them to gain finance from conventional sources.
Thankfully, the emerging number of online financial companies offering good deals on various loan segments is a big breather.