Consumer loans are generally associated with being expensive and not favorable. This is due to the soaring interest rate, which is often around 20 per cent. However, there are many scenarios that borrowers might consider using consumer loans. This is clearly evident from statistical data showing that huge sums are being borrowed. If you first intend to apply for a consumer loan, you should conduct a small preliminary study, as different providers have very different loan terms, including the interest rate on the loan. The interest rate on the loan is a percentage, which, multiplied by the loan amount, tells you how much you as a borrower must pay, in addition to the amount you borrow. This interest rate depends, among other things, on three factors:
- The lender’s profits will have to lend you money.
- The risk the lender takes is by borrowing money.
- The policy rate
Effective vs. nominal interest rate
Nominal and effective interest rates on loans are often discussed. An ordinary man in the street does not know the difference, but he should if he intends to take out a consumer loan.
Nominal interest rates can be understood as the very basic interest rate on the consumer loan. It does not take into account other expenses associated with the loan, ie fees and the like. The nominal interest rate will therefore be lower than the effective interest rate, and does not really tell you what you actually have to pay.
Effective interest is the interest rate that shows what you are actually paying. It has bound all the costs / fees associated with the consumer loan. The effective interest rate is thus the interest rate that tells you how much you have to pay in addition to repayment of the loan amount.
How to obtain the lowest effective interest rate?
In today’s market, a large proportion of players offer consumer loans. Through some quick searches on the internet one can find articles with a rating of lenders based on effective interest rates. It is rare for an operator to offer loans with the lowest effective interest rate for all scenarios. When you apply for a consumer loan, the interest rate you get on the loan depends on various factors. To name a few:
Loan Amount Size – Fees will represent a larger percentage of small loans, which will make the effective interest rate large compared to the nominal.
Creditworthiness – Some players may offer lower effective interest rates if you have good creditworthiness. So you should look for it if your credit rating is good, but if you have poor credit rating you should look for lenders who do not take it into account.
When these factors are taken into account, it is important to explore the market for providers with the lowest possible effective interest rate for you. Web based search engines can give you a lot of information about market players with what they can offer. You can also contact your bank for advice and information.