Up until a few years ago, it was remarkably difficult to get a loan of any kind. If you did not have a secure job or a good credit history then it was likely that you would be declined within a couple of seconds of application. You might even be flat out rejected by your mother.
When the credit crisis hit a few years back, something that we are still feeling the effects of to some degree, lenders very quickly decided that this was perhaps not the best business model for when it came to generating profits. Sure, it would give them a nice stable income, but there was now a treasure trove of people out there who were desperate for money…and they would do absolutely anything to get hold of it. Enter; ‘easy to obtain loans’.
Now, you may have seen a number of places loans being advertised which have VERY limited requirements if you want to get hold of one. They mostly related to little to no credit check, or in some cases no requirement to have a job or even to meet with the lender. I am sure you knew this already however these lenders ARE not offering these loans out of the goodness of their hearts. The offset to balance up the ease of access to cash and credit comes at a price. A pretty hefty one too.
They really don’t want to splash around their cash when they don’t have to. They really don’t care that you are in financial difficulty. Well, they do. They care if they can make a profit out of you and as the current personal loan industry has shown, you are INCREDIBLY easy to make a profit out of if you have next to no cash. Many times, the interest charges can be so high that lenders can break even within a couple of payments you make.
Part of the reason as to why it was so cheap to obtain a loan in the past was simply down to the fact that you were trusted. A lender could look at your credit report or stability in your life and realize that you would most likely be able to pay the money back when you said you were going to do so. They did not need to charge extortionate rates simply because there was no risk on their part. It was easy money. The economy was so good, and people are doing so well financially, that there was great confidence that borrowers will be able to repay their debts easily. It might even be more difficult to fall into the debt trap.
Easy to access loans are a whole different ball game though. You see, very limited checks mean that they really don’t know how much of a risky proposition you are when it comes to offering loans. They don’t know if you are going to be paying the loan back on time. If you do, then there are probably countless numbers of people who ARE NOT paying their loan back. Lenders do not like to lose money. They really don’t. The high charges that you are paying means that you are covering all of those who don’t actually pay for their loans (the lenders have to get their money back somehow).
The higher risk an investment is, the higher the expected rate of returns.
In addition to this, it is likely that the lenders know that the people who apply for these types of loans are in desperate need of cash. They sort of target these people to some extent because they know that they have absolutely nowhere else to turn. They are likely to pay higher fees to help them in the short term, and thus the lenders have absolutely no issue in raising their prices. It allows them to turn a nice little profit.
So in short; if you can, always apply for a loan which is a tad more difficult to apply for. It may take a bit of extra effort, but it will be a whole lot cheaper for you. There is a reason why the most difficult loans to obtain approval for tend to be the cheapest as well. Because stringent check are made to ensure the repayability of the borrower. So when a borrower is able to pass stringent credit assessment analysis, the is a higher likelihood that he will be able to promptly repay his debt well. This lower risk translate to a lower expected rate of return.