When does an interest rate become ‘shocking’ to you?
The interest rate being charged on loans by certain lenders is a hot topic in the media at the moment. With some unscrupulous lenders charging APR’s of 5000%+ and sometimes trying their hardest to disguise the fact by not mentioning the APR in their television adverts, loan interest rates are something that have caught the eye of regulators, debt charities and also the financial ombudsman service.
However, not all companies who offer loans to those who are considered to be ‘a bad credit risk’ by banks and other mainstream lenders charge such high rates of interest. Recently I have noticed a wave of lenders coming into the market place who are positioning themselves somewhere in between the banks and the high interest lenders with interest rates of around 40-80% per annum but sometimes higher, for the purpose of this post let’s call them ‘middle’ interest lenders. This phenomenon got me to thinking, at what level does an interest rate become ‘shocking’ to the majority of people? What would most people consider to be an acceptable rate of interest if they were looking to get a loan for perfectly reasonable purposes but mainstream banks were refusing to lend to them?
Let’s just say that somebody wanted to borrow £1000 to start their own small business but mainstream banks and even peer-to-peer lenders refused to lend to them because they don’t fall into their lending criteria. Perhaps they have recently lost their job or have made a late payment on a mobile phone bill within the last 12 months and this unfortunate error has affected their credit score enough to make it so that the banks won’t lend, so they start to look to other lenders in the hope of securing the finance they need. While searching they come across a lender who is willing to lend the cash to them but they are charging an APR of 40% over a 12 month period, meaning they would repay £1,229.66 over the course of the loan term or £102.47 per month for 12 months, so the total interest paid for a 12 month £1000 loan would be £229.66.
Obviously starting a business is a risky proposition but it could equally be a profitable one. If the person truly needs the cash to be able to start their venture and they either need the money quickly or they can’t afford to save the money needed without having the income that they hope this business will provide, then would you consider an APR of 40% to be an ‘acceptable’ rate of interest to pay on an annual basis in order for them to get their business dream up and running? If you don’t consider 40% to be acceptable, then what kind of rate would you consider to be reasonable when lending to somebody who is for whatever reason considered to be a credit risk, 20%, 15%, 10%?
I am in no way advocating that people go and get a loan from any of these ‘middle’ interest lenders, as we’ve mentioned a few times recently any debt carries a degree of risk and should be very carefully considered. As more and more of these ‘middle’ interest lenders pop up though I thought it would be interesting to gauge people’s opinion on a controversial question.
At what level does an interest rate become ‘shocking’ to you?