As the economy of any country, and indeed global economy or society as a whole is driven by the availability of money, it is fair to say that rates are at the heart of what drives the interest rate environment we live in, even though some may argue otherwise. So, let us take a look at the five main areas where lending and borrowing money takes place.
Interest on personal loans
Interest on personal loans means that you borrow money from someone as an initial loan, and you pay back this loan over a period of time, usually monthly. This applies to all types of personal loans, including private student loans, mortgage loans, credit cards, etc. An example of such a loan would be a payday loan – payday loans are loans used for short-term financial needs to help get through the next month without spending any big amount. It’s a very easy way for borrowers to make big purchases without needing much money down – but it also has its risks. The first risk comes down to payment interest – which can start charging you regular interest rate for making small payments while also setting you back on your repayments by a large amount. Also, you have no choice but to pay anything you want in advance – so there are options for both paying in full at once, in installments, or delayed. There are options for repayment plans so you could be paying off a one-off fixed-term financial product or a long term financial plan based on various income streams. In summary, it would seem that the best option would be to choose an alternative to payday loans (such as installment plans). However, given the current economic climate in many people’s countries, the likelihood of getting the cash back could be slim as lenders are likely taking their profits at an already depressed level of interest rates.
Interest on Credit Cards
Interest rates on credit card applications matter, as the rates are often much more expensive than those on traditional bank lending. The credit card companies charge the borrower an annual percentage rate which differs with each person. For example, Santander will charge 0.16% in Spain, while HSBC charges 1.4% on UK credit cards. On the flip side of things, the Chase Bank (which was acquired by Lloyds Banking Group in 2013) charges 1.75%, whilst Lloyds Bank charges 3%. The above charges come into play when using different banks for your application. Therefore the probability is slightly higher for credit card use, especially when compared to personal loan usage, especially if you are not familiar with your lending history. We’ll talk about this further below.
Interest rates on Personal Loans
Interest rates on personal loans vary widely between banks and credit unions that offer them. Below are three high street banks which offer the lowest interest rates – although they do require the applicant’s account number to provide proof of address – or the applicant must be 18 to sign up online in order to apply for finance. HSBC Bank – currently the highest in Europe – pays an average of 1% – but Lloyds and Santander both pay over 2%. Borrowers who cannot afford the rates should only consider applying to larger banks, as smaller ones tend to go out of their way to push higher interest rates. For example, these four banks – Barclays, Natwest, HSBC and Nationwide have all offered lower mortgage rates, but Nationwide currently claims the biggest mortgage rate of all the banks. Of course, other banks are offering similarly low rates too. Whilst they do require applicants’ prior year earnings and income level in order to qualify, some banks go way out of the door. A great example is Halifax, who currently offers a 4% loan on home equity, £1,000 and €1,000. While this seems like quite a lot by comparison with the British market, HSBC is just 3% away with Halifax.
Interest rates on Student Loans
Student loans are sometimes known as “loans for life”, meaning the repayment will be made over a lifetime, which is normally around 10 years. They are typically available for universities in most cases, however this can be extended to specific institutions for certain courses, such as apprenticeships and degrees. One such institution that has recently increased its repayment limit is Cambridge University, following a survey that nearly two million students had completed during 2020. Once again you have to be 18 and you need to submit evidence of age, or you will not be able to do any form of loan. If you do not have a degree or qualification, then, by default, you will receive less credit than those of those who do not. To compensate for this, the lender will charge you interest over a longer period of time, which will add around 50% more interest over the ten-year length of the agreement. Given how young the majority is these days, the costs of attending university have grown over recent years. At GCSE level a student can expect to pay between £1,000 and £10,000 in total fees. That can grow as the demand for studying rises, whilst at the same time they will also find the cost-of-living more difficult compared to the older students. But again, this is the case across the board, with no clear path for those who might be looking to obtain a post-graduate degree, or even those who wish to go to an uni or college degree. Even though you may not know if you will ever obtain a degree or finish your degree, it is worth keeping an eye on how much interest rates can take in order to be on the safe side when deciding whether or not to attend university for your final year of studies.
Interest Rates on Repayment Plans
This is another area where the interest rates charged reflect how much the company feels it will be earning on the plan itself, versus the rate charged on interest on its debts. This makes sense from hindsight; the bigger the payout, the bigger the interest rate paid over a set period of time, so obviously the lender wants to have some savings on any outstanding debt, which in turn implies higher interest rates and higher repayments. Although there are some good options available, repaying any sort of personal loan can feel like a gamble, not least because interest rates can change quite quickly. And because most personal loans often include a fixed repayment schedule, you will find yourself paying even more interest than the firm’s stated maximum balance. Furthermore, since it is generally easier to access personal loan interest rates, you are always better advised to pay a little extra. Some repurchase/repayment plans will provide for partial repayments or interest payments on the instalments – so this effectively allows you to switch lenders or move money out of the family budget. These plans allow you to build a flexible fund to pay for your daily expenses in line with your chosen lifestyle – so it is also possible to shift this to different debts to meet your changing budgets.
Interest Rates on Alternative Lending Companies
Interest rates on alternative sources of finance are a lot lower, with most being below 0.5%. An alternative source that has become extremely popular over the past couple of years is crowdfunding, mainly targeting independent artists and creators around the world. Artists including Travis Scott and Raulston Martin, among others, have taken advantage of Kickstarter campaigns to release several new music albums. With a minimum investment of $100 (about £72), the artists who receive the funds can use them as they see fit. The platform allows them to work with record labels, film production companies and other producers as well as distribute the tracks themselves – with the potential to earn more and share the proceeds with existing fans. As the demand for art from independent creators continues to increase, the competition over funding from major corporations is going to continue to mount. Ultimately the winner is going to come down to the artists themselves. All they can do is compete for talent and success within the industry, but unless they have substantial assets, I see no reason why they shouldn’t produce and create something. Many, like Indiee Xtravaganza, have found support from established musicians in the entertainment industry, and have been able to make a living from creating records, working with studios and distributing the CDs. Others such as Jeezy and Big Freedia (both based in Los Angeles) rely almost exclusively on donations to keep their projects alive. Without huge amounts of fan support, I think it’s unlikely that either of them will reach the levels they have. Either way, whilst raising money for a project should be a goal for many, the actual revenue that gets generated from the project is much smaller, compared to relying solely on monetary funding. Indeed, while crowdfunding platforms have been incredibly successful for releasing countless musical acts, they also raise millions and billions of dollars every year. Just look at the chart topping album releases of Kanye West, Justin Bieber, Jay Z, Rihanna, Adele and Taylor Swift, among thousands of others. From a business perspective, a significant amount of money is raised from crowdfunding, however the true returns on investments are far smaller, with even bigger companies simply not making a profit on the venture.
Interest Rates on High Grade Loans
As previously discussed, there will continue to be interest rates on high grade loans. According to the Experian Bank website, the interest rates levied by commercial banks on high rates are between 6-7% per annum. Banks can charge an interest rate in excess of 8% on a high yield loan, or even 12% on a fixed rate loan, according to the website. By contrast, for instance, TSB offers variable rates ranging from 2% to 7%. On the other hand, Santander provides only a minimum threshold of 11% – suggesting that only a limited number of customers would be eligible.