Financial Companies vs. Banks: The Battle of Interest Rates
For borrowers’ minds, the choice has always been a tug-of-war between banks and financial companies – especially in terms of the interest rates. So once and for all, it’s time to settle the score on why private lenders actually charge higher interests than banks.
Let the battle begin!
Round One: Easy Come, Easy Go
Basically, because of the easy applications, financial companies are at greater risk of “runaways” or those who don’t pay back their loans. Because of the limited information that were required of them to provide, it becomes harder to track down the applicants. The higher interests are then used to compensate for these instances when some borrowers just disappear.
Round Two: Gaming 101
In relation with the one stated above, financial companies are also at high risk of “gamers” or those who uses the system and processes to their advantage. Because most non-bank financers don’t usually require people to submit collaterals and other proof of their credit scores, there are some with bad credits (which is why they are no longer approved at banks in the first place) who apply as a last resort when they are really in need but also end up not paying. A sad truth.
Round Three: Funding
Since banks have several means to earn their revenue (such as depositors and the like), they have the luxury to give more loans with a lower interest. However, this is not the case with private lenders. Because it is their only business, they generally have a smaller capital to circulate and placing a higher interest is one of the ways that they can keep going with enough funds while still earning profit.
Given all these circumstances, it may seem like banks are the real winners here. Yet, it is important to also take note that these big-time corporations also involve more complicated procedures, longer waiting times, and stricter policies for compliance in terms of paying them back. Meanwhile, despite their slightly higher interest rates due to the reasons stated above, most lending companies offer convenience, accessibility, and speed when it comes to delivering what you need! So in the end, the decision is still entirely up to you and what suits you more efficiently. Make your choice today!