2017 Consumer Finance
According to the most recent federal consumer finance reports, 2.5 million auto loans were originated in the United States in March 2017. That’s $53.8 billion dollars in new loans, a 3.4% increase in year-over-year auto loan originations. Accounts on your credit report fall into six major categories; installment, revolving, open, secured, and unsecured credit. Often, these categories have overlapping features.
Installment loans are extended with the expectation that what is borrowed will be repaid in equal amounts over time. This type of credit is commonly used for large purchases like car loans, mortgages, or student loans. In these cases interest is often charged at a fixed rate and is calculated as part of the loan. Each payment is known as an installment, hence the name “Installment” loan.
Example of Installment Credit:
Gina signs a contract for an auto loan in which she agrees to pay the lender $250 per month for the next four years.
When a person borrows money, the lender earns money by charging a fee. The cost of borrowing this money is known as an interest rate. Interest rates are commonly expressed as a percentage of the total amount of money borrowed. The lender, over time, charges this fee based on how long the borrower takes to repay the loan. The amount of money that is actually borrowed is referred to as the principal. The primary goal of every borrower should always be to pay the least amount of interest so that the money that is paid to the lender primarily goes towards the repayment of the money that was borrowed. Naturally, the higher the interest rate of a loan, the more the lender will earn.
So why don’t lenders charge everyone a high rate?
Fortunately for you, the consumer, competition keeps interest rates low and gives you the opportunity to shop around for the best loan to suit your needs. When a lender is deciding on an interest rate there are many factors they consider. Your risk profile is first. If you fall into a high-risk group based on your past financial activity and reputation you will be charged a higher interest rate.
Am I a “high-risk” borrower?
If you have borrowed money in the past and left loans unpaid or received merchandise or services that you agreed to pay for and did not, then you fit the profile of being a higher risk. Lenders will look at your history of borrowing and repayment. Your credit score will be a direct reflection of this. Since this rating is a direct reflection of whether you meet other financial obligations on time, potential lenders take it very seriously.
How can my lender be sure I will repay my loan?
In the industry of loans and financing, just like everything else in life, there are no guarantees. There is certainly a degree of risk involved even with borrowers with the highest credit scores. Customers who have lower credit scores and are clearly a higher risk are often asked to provide some type of additional security that they will live up to their commitment. This security is known as collateral. A security or collateral is something that holds great value, such as a home. When a secure collateral is offered along with an agreement to repay the risk factor decreases significantly for the lender and the borrower may receive a much lower interest rate.
Shopping around is the best strategy when it comes to finding the best interest rate. You may not be able to dictate the factors your lender will use to consider lending to you. You can, however, ask for lower interest rate than what you are offered. Try to negotiate and remember that banks, credit unions, government lending, mortgage companies, and even payday loans as a short term alternative may be good options. To maximize your chances of receiving lower rates in the future be sure to make your payments on time every time!
