Category: Loans

Loans

Common Misconceptions about Payday Loans Clarified

As the American public emerge from the economic recession, they have become more finance aware. This means that borrowers have a better idea of what they are getting into and make educated decisions. A survey conducted by Pew suggests that majority of the public knew how to manage their finances and also what source of money should they turn to in order to meet their shortcomings. However, a U.S. based financial analyst has described the current economic environment in the country as stable but indebted. This means that although most people have attained economic stability in the wake of the recession, not everyone has full recovered from its effects.

According to the U.S. Census Bureau in 2015 most of American citizens had unsecured debt. Quite a few of these borrowers had had to default at one point or another during the economic downturn. This left them with bruised and bad credit profiles making it much harder to acquire reasonable loans from banks and other lenders.

This is where Payday lenders have succeeded in bringing much needed cash to borrowers. By the middle of 2016 about 5.5 per cent of adults in America have had to use a loan from a Payday lender. This type of lending is meant for a short term period to pull one over till they can manage to secure their finances. The usual time frame for such loans are anywhere from two to six months. And according to a market study, majority of user would recommend a Payday loan company to their family or friends.

As this type of lending is not secured against any asset of the borrower, the risk for the business is generally high. While a minority of Payday loan users default on their payments, this has caused the industry of such short- term loans to keep their interest rate comparatively high. This has led to some prospective borrowers to eye this type of lending with distrust. Some points that are the most common to play across the first time Payday borrower’s minds have been clarified here.

High Interest Rates:

This is the most common, yet widely misunderstood issue picked up by the critics of Payday lenders. These loans are designed to help borrowers manage their expense for a short period of time, usually anywhere from a week to a few months. It is not meant as a long- term loan solution. The default rate of about 30% of borrowers from Payday loan companies are the reason it is very risky for the business to hand out loans, therefore they keep their interest rates at a higher level than long- term loans from banks or other finance sources.

The interest rate shown by Payday lender also represents the annual percentage, and as these loans are meant to be re- payed after a much shorter period, the amounting interest is a small portion of the original loan. A leading British Payday loan company has explained this by providing an example that a borrower taking out a loan of £100 over a period of one month would have to pay back £120 by the end of it. This would include the amount borrowed as well as the interest.

Affordability Assessments:

An online Payday lender has advised its customers that before taking out a Payday loan it is important to keep the end of the contract in perspective. If there is not any stable income coming in, it would be a risk to take out a loan without knowing if the borrower would able to make all the repayments or not. This could result in the loan being rolled over with additional charges, making it even harder for the borrower to pay it back. In the U.K. the amount that has to be given back to a Payday lender cannot exceed 100% of its original loan value. This has provided some users a safety net if they repeatedly fail to make the payments.

Prior to handing out the loan, the lender usually makes an assessment based on the probability of the customer making all their payments. This is usually done on the spot by analytical software and the judgement of a trained lending broker.

Actual Benefits of Using a Payday Lender:

The cost to benefit ratio of a loan taken out from a Payday lender would wholly depend upon the borrower. According to data collected by Pew, 81% of borrowers said they would have significant difficulty in managing their finances without a Payday loan. Nearly 16% of borrowers had taken out a loan to pay for emergencies and would have not been able to afford the expenses without the speed of a Payday loan.

However, the most significant benefactors of a Payday loan would be the people who have a bad credit score, most probably from scrapping out of the recession.

Finance

Are Taking out Loans Getting Cheaper?

With the financial market recovery in full swing from the recent economic recession, data from several sources suggest that people are taking out more and more loans. This seems to be in direct relation to the downwards trend of some interest rates as data from the Federal Reserve shows. Credit cards loans, mortgages, student loans, and car financing etc make up the bulk of all lending that takes place in the U.S every year. This article will explore the co relation between the possibility of whether or not there is a trend of depressing loan interest rates and if it figures in the trend of increasing borrowing.

Credit Card Interest Rates:

With around 174 million Americans using credit cards for paying their daily expenses, this makes it one of the most common forms of loans taken out in the country. According to a survey conducted by the U.S. Federal Reserve, the average amount of credit taken out on credit cards has risen by 1.16% in 2016 compared to the previous year. However, a U.S. based online credit finance research company found that the average rate of interest charged by the top one hundred credit card issuing companies didn’t show any significant reduction in their charges. The average interest charged to an American credit card user stood at 15.18%, which is a sliver lower than it was six months ago at 15.19%.

This, therefore, could not be a factoring element in the rise of credit card loans taken out in the past year. However, a report published by an online data analyst company noticed a significant increase in marketing of credit cards this year, which might have influenced the increase in the user base.

Mortgage Interest Rates:

The average 30 year mortgage has remained more or less uniform over the past several years, same as the 15 year mortgage policies. However, according to a market surveys, these rates have recently been climbing to levels that were not observed since a few years ago. At the tapering end of 2016, the 30 year mortgage rate crossed the 4% barrier and stood at 4.08% as compared to 3.95% during the same period the previous year. This average was calculated by analysts using data from policies offered by large market lenders.

Despite of the increase in interest rate in mortgages, more people seems to be lending to purchase houses. Data released by the Federal Financial Institutions Examination Council as the Home Mortgage Disclosure Act (HMDA) showed that for the past several consecutive years the number of new home- owners has been increasing. The most common type of mortgages taken up by them were 30 year policies. The data also revealed that fewer people were refinancing their properties.

The concept that interest rates are reducing, therefore does not explain the increasing number of people taking out mortgages. This could, however be attributed to an improving economy and essential, economic stability of the borrowers.

Student Loan Interest Rates:

The nearly 44 million students who took up student loans to finance their education had been doing so at a reduced level for the past four years due to the Congress passing a bill in 2008 for a temporary interest rate reduction. The cut, which only affected subsidized Stafford loan, lasted for four years before being reverted to the normal fixed rate. According to statistics from the Department of Education this led to an increase in number of students making good of the opportunity and securing loans to fund their higher education.

However, since the resumption of regular interest rates on student loans, there has been much chatter about the cost of higher education studies in the U.S. Student financers have since been offering anywhere from 3% to 14% interest rate depending upon the lenders and the study program.

During 2013, a policy was enacted in which the government had set fixed interest rates on student loans issued for the upcoming year based on the interest rates on the 10-year U.S. Treasury notes. This has resulted in the drop of interest rates for the past consecutive to years. As a result, the 4.29% on Stafford loans issued for the 2015 to 16 year dropped to 3.76% for the upcoming 2016 to 2017 year.

U.S. Prime Interest Rate:

For the stability of the financial market, a stable prime lending rate is essential. However, since the interest rate can’t be maintained at a particular level indefinitely, lenders figure this variable into their financing while giving out loans. All financial institutions use the U.S. Prime Rate while providing lending services to their borrowers. The Bank Lending Rate in the U.S. has remained constant for the past several years, hovering at around 3.5%. This rate isn’t a law, but a recommendation for financial institutions to provide their lending services.

These lending figure all point towards a decrease in the cost of borrowing. This combined with the improving economic stability provides a fertile field for borrowers to feel more secure to take out loans.