As an upcoming adult, I have begun my own research in bank loans and interest rates. What was most apparent to me in the early stages of my searching was that different types of loans have different interest rates. At first this was confusing – money is money, so it shouldn’t matter what it’s for…right? Wrong. If you’re a bank, everything matters; especially the likelihood of a borrower paying off every penny they owe. This is decided based on a person’s credit score. On paper, the bank can look at a credit score scale, and place you on it according to how you have built, or broken down your credit throughout your financial lifetime. Someone with a high credit score will be more likely to pay back a loan to the bank in full, where as someone with a low credit score would be considered a high risk borrower. Having good credit is crucial; and having no credit could mean being turned away as well.
Once you have been approved for a loan, interest rates are tacked onto what you would have originally been paying back. Interest rates vary depending on the economy, area, credit, and most importantly, what the loan is specifically for. According to Bankrate.com, the current 30-year fixed mortgage interest rates in the Boston, MA area range from 3.75% – 4.23%. However, this is barely comparable to Boston, MA auto loan rates, with (APR) interest stretching from 1.99% at LightStream to as high as 7.99% at the Rockland Trust Company. Student loans in the Boston, MA area vary from as low as 2.25% to as high as 10.4%, and seem to be the most heavily influenced by credit alone.
Another reason that different types of loans have different interest rates is due to the ability to repossess. Car loan interest rates tend to be lower than student loans because, if you don’t pay off your car, the company you borrowed the money from can (and will) come take the car back. However, if you’re borrowing money to pay off classes, the money is gone once you get it. There is no way to repossess the money that you owe someone if you don’t have the money in the first place. This is where loans get risky for the lender, and they must rely on your credit score to ring true. Another way to avoid such a large risk of never being paid back is by taking collateral from the borrower until the money owed is paid off. If the money is never paid back, the lender can take the item that was of equal or lesser value and sell it to gain back a portion of the profit they lost.