Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a broker not a lender.
Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a broker not a lender.
Nov 20, 2019
Interest rates can be higher for unsecured short term loans when compared to secure lending. All lenders have the discretion to choose an appropriate rate of interest or annual percentage rate but they cannot breach the cap, as determined by the regulatory authority of the government. The cap for secure lending is more stringent than for unsecured short term loans. It is no secret that unsecured loans are riskier. There is no credit check for many such types of loans. Lenders do not always ask for collateral or security. They compensate for the high risks with greater interest.
If you compare the interest rates levied by banks, the range is much more conservative than the variations in the annual percentage rates of private lenders. You will observe difference of a few basis points. At the most, banks will have rates varying by one or two percentage points. It is rare for banks and traditional lenders to have rates as distant as five percentage points. The difference can be stark in cases of unsecured lending. A private lender may charge as much as ten percent higher than another firm. Greater differences are also widely observed. This begs the question, what influences this difference or how do interest rates vary for unsecured short term loans?
Interest Rates Depend on a Plethora of Factors
The first factor is discretion. Lenders have their own policies. Some lenders are more generous and have relatively reasonable interest rates. Some lenders may not be so lenient and have unreasonable rates of interest. While lenders tend to have a representative rate of interest, the actual annual percentage rate levied on your loan will vary. Borrowers should not presume that they are getting the same interest rate as others, even if it is the same lender. A lender has the right to charge different interest rates. This leads to the other influencing factors.
The loan amount and repayment term influence the rate of interest. A small loan amount may or may not incur a higher rate of interest. If the loan amount is nominal, then the risk a lender is exposed to is mitigated. The lender may be a little generous with the interest rate. On the flipside, a lender may want to maximize its return even with a smaller loan amount so the high rate of interest may remain unchanged. The repayment term does have a significant impact. When a borrower goes for a shorter term, the rate may be quite high for the lender to make enough profit. If a term is extended, then the rate may be a tad lower. This is not an industry wide practice. There is no rule or norm that compels lenders to have such a practice.
The other quintessential factor that influences interest rates is the risk of a particular proposition. This is directly dependent on the financial profile of a borrower. If a private lender thinks a borrower or applicant is high risk, then it can increase the rate of interest so it can recoup as much of its investment as it can, sooner than later in to the repayment term.