It is quite challenging to obtain lower interest rates for small emergency loans. It is partly because such loans are aimed at subprime borrowers and partly because they involve a high risk of default. In order to mitigate their risks, lenders charge high interest rates. Borrowers do not discern the fact that loans seemingly affordable because of lump sum settlements actually cost them five times the borrowing money, thanks to annual percentage rates, which include fees on top of interest payments.
Financial experts enjoin that annual percentage rates, which indicate the annual cost of a loan, must be analysed to determine their repaying capacity. Still, borrowers ignore this and makes their decision based on interest rates because of a short repayment term, usually not beyond a month.
It is quite overwhelmingly challenging to find a loan deal with a competitive interest rate, especially if you are a subprime borrower and borrowing a very small amount of money. There are certain facts that must be unravelled if you are looking to grab the lowest rates:
Emergency loans at low interest rates are elusive
Emergency loans come in all shapes and sizes. Whether they are advertised as payday loans or small loans for bad credit, on no account will you qualify for them at the lowest possible rates? These loans are sought after by bad credit borrowers, and hence, there is no possibility of securing lower interest rates.
The risk of default is too high, which is why lenders charge high interest rates. The only way to avoid accumulating debt is paying in fell one swoop on the due date. One missed payment could exponentially increase the cost of the debt, making it difficult for you to adhere to payments. As interest rates differ from lender to lender, you are enjoined to carefully research the market to pick the relatively lowest possible interest rates.
While you come across lenders advertising their deals to be the most affordable, these claims should be disregarded as outlandish. There is always the likelihood of being trapped in a never-ending cycle of debt due to loan sharks. Subprime borrowers are vulnerable to loan sharks as they more often than not need money to meet emergency expenses, and their bad credit has resulted in disapprobation from other legitimate lenders.
In the temptation to bridge the gap, they borrow money without realising that they are signing up for extremely expensive deal. Loan sharks charge exorbitant interest rates and do not follow responsible lending practices. When the due date comes, you find yourself short of cash to clear the dues, which results in a rollover of a loan, and eventually, you find yourself in a spiral of debt.
Instalment loans could be secured at low interest rates
Contrary to small emergency loans, instalment loans are paid back over a period of months. These loans could be secured as well as unsecured. Instalment loans come with a large sum of money, so payments could be extended over a couple of months.
Instalment loans are not as expensive as small emergency loans; however, unsecured loans are more expensive in relation to secured loans. In order to qualify for lower interest rates, you must have a good credit score. While emergency loans do not include your credit rating, personal loans cannot be approved without hard credit checks.
This means that hard inquiries will be recorded on your credit profile. As other lenders could see them, your credit score will plummet, but after making a few payments, your score will certainly improve.
However, just a good credit rating is not the be-all and end-all when it comes to acquiring low interest rates. Lenders peruse your overall credit profile. For instance, your debt-to-income ratio will be considered. A golden rule of thumb says that the ratio should be as low as 25%. The lower, the better. A high ratio will not eventuate in negative implications on your credit rating, but it will call your credibility into question. Lenders will be sceptical about your repaying capacity, and amid concerns, they might turn you down.
If you are looking for a secured instalment loan such as an auto loan or a mortgage, it becomes more vital to keep the debt-to-income ratio low. If possible, you should not owe any money at the time of taking out these loans.
In addition, you must have a sound income source. A stable and consistent income source makes lenders believe that you will not struggle to keep up with payments.
Debt is expensive
Even if you manage to secure a loan at a lower interest rate, they are expensive. It is because you are to pay interest on top of what you borrow. Bear in mind that you also pay additional charges and fees along with interest. Nothing is better than savings to meet small emergencies. You should try to build a safety net so you do not have to rush to lenders when caught off guard.
As far as instalment loans are concerned, make sure you arrange a larger deposit. A bigger down payment reduces the loan-to-value ratio, and as a result, you save a lot of money. You are also recommended to choose a repayment term carefully. Short repayment periods could increase the size of monthly instalment, but they cost you much less money than loans with longer repayment terms.
Understand your budget carefully and then decide which one suits your needs best. Instalment loans without a guarantor should be chosen cautiously, regardless of whether you need money for planned or unexpected expenditures.
To sum up
In order to obtain the lowest interest rates, you must have a stellar credit report, a strong income source, and a low debt-to-income ratio. However, the fact is that debt is always expensive, and you should borrow money with caution. Borrow money only when you are certain that you will not fall behind on payments.
