Whenever you apply for a loan that can be anything like a instant payday loan, mortgage, auto loan, long term loan, etc, you very well know about the amount of cash to be borrowed and rate of interest charged by the lenders. Similarly, loan aspirants know the procedure to apply for a loan from the time to make loan request, arranging documents, signing papers and submitting it to the point of finally receiving payday loan money and paying it afterwards. In the middle of all these things, one thing left for you is how the rate of the loan is decided by the lenders.
This is not the commonly asked query shared between a borrower and a lender but, still, it is imperative for people to know exactly on what basis and rate of loan are decided by the finances. How do lenders decide the rate of interest rate on loans? Why lenders charge a higher rate than another lender that makes sense to ask how they calculate it? Wizz Cash Now are some other questions interrelated with this issue which is being talked here.
Few of the scenarios that help the financers to determine loan rates are as follows:
Interest Rate Policy
Financial institutions, banks and individual lenders charge an interest rate on loans. They decide to charge a specific rate based on factors like current rate prevailing at the market place and the competition. These factors become interest rate policy that financers have to follow and to determine to charge either high or low loan rate.
Finances decide the interest rate based on the several market-based factors like level and growth in Gross Domestic Product (GDP) and inflation. The demand for the loan at the market place also form the basis of market forces that allow the finances to keep the interest rate high or low.
Collateral or No Collateral
Payday loan interest is basically charged by the lenders to gain profit from the loan and also to cover the risk factor involved in the loan process. Someone placing personal assets or belongings that can be like of cars, jeweler, stock papers etc, lower the risk factor of loan which means the lower interest rate will be decided lenders. On the other side, no collateral scenario simply means charging higher rate from the loan seekers.
Cost of the Loan plus Loan Pricing
This is a practical approach implemented by the financers to decide as what rate of the loan to be charged. Following factors will make it clearer:
- The funding cost levied the lenders on loans.
- The operating cost of loans like application fee, processing fee, etc.
- The risk factor involved in the loan.
- Profit margin under the procession of a loan.
In today environment, competing in the financial market toe to toe with leading lenders is a herculean task. Due to the rise in the competition managing profit margin from loans is at stake for the financers. This has resulted in more financers adopting price leadership method in establishing the cost of credit.
Credit Scoring System
Check credit scoring system is a useful method adopted by the lenders in setting up an appropriate rate for the people tagged with either bad or good credit scores. Giving out a payday loan to individuals having not so good credit history involves a great amount of risk and as a result, a higher rate of interest will be levied by the lenders.