Dec 23, 2018

Why is the interest rate of financial companies higher than banks?

Banks are great institutions, but they have a very stringent policy in issuing loans to individuals. This is because they want to mitigate the risk of default by customers. On the other hand, financial companies are do not have such a strict policy unlike a bank, however so they do take on more risk. And the only way to justify that risk is to charge a higher interest fee.

Let’s look at both institutions in detail:

Financial Companies

These organizations are geared for lending and offer faster, higher value loans with greater tenure to individuals and businesses that have poor or low credit scores. This indicates that financial companies take on more risk as there is a greater chance of its customers delaying or defaulting on loans.

Therefore, the financial risk these companies must bare is incorporated as a higher interest rate charged to the end customer. But there are advantages in obtaining a loan through a financial company.

  1. They issue loans to individuals/ businesses with low(er) credit scores
  2. The cycle time from loan application to funds credited to your account is at least twice as fast as a bank
  3. Financial companies will issue a loan for the amount you want (most of the time)
  4. You do not need to have a prerequisite of documented information to apply or be eligible for a cash loan

Banks for Lending

Banks also lend money but at however lesser interest rates than financial companies. They do this by ensuring that they only lend to individuals and/ or organizations who have been properly screened and have the capacity to repay the amount (with interest) in a timely fashion. The approval time of obtaining a loan from a bank is much longer than from a financial institution, but that’s just to ensure that they have mitigated the risk of lending as much as possible. There are instances where banks have refused to issue loans if customers do not have any credit history with the said bank.

Therefore, if you have all your details in order and have a positive credit history with your bank, obtaining a loan from them is more beneficial and cheaper. However so, if you do not have your documentation in order, in need of funds immediately and do not have a credit history; obtaining a loan from a financial institution may be your alternative option. But at a higher interest rate.

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Dec 23, 2018