Why are Interest Rates Higher on Personal Loans?

You need money and fast. Without a great credit score or any type of collateral to your name, the only option is an unsecured personal loan. After searching the web, you have noticed the interest rates are substantially higher than other types of loans out there. The fact doesn’t change that you still need to borrow the money, but now you cannot help wondering, “Why are the interest rates higher on personal loans.

Most personal loans are granted as unsecured loans. Borrowers don’t necessarily need to have the best credit or even any type of collateral as that is not the primary concern for the providers of these types of loans. Unsecured loans are provided more on good faith and what lenders need to provide are their name, social security and income verification. No collateral is needed so if the loan goes into default, the lender will not get anything in return. Higher rates are the price to pay for not having collateral or a co-signer on these types of loans.

Because the lender is not operating with any type of collateral from the borrower, they are taking a greater risk. With that great risk comes higher interest rates as that is what a borrower can offer to a lender in that higher risk situation; a bigger rate of return.

Banks or credit unions do not usually process unsecured personal loans, thus the rules for loaning the money aren’t as closely monitored by the Federal Government (although new rules regarding interest rate caps looming on the horizon). The rates also tend to be higher for that reason as well.

With bigger risks come bigger payouts. Whether it is in the guise of starting your own company, putting all the money on one horse to win or by lending high-risk borrowers money, the returns are greater because of the bigger chance taken. Unsecured personal loans are a great way to borrow money quickly if you are in a pinch, but it is less than likely a great bargain will be found on the interest rate that you will have to pay.