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Why confidence is important

I started lending money to other people through Zopa, a couple of years ago. I get higher interest rates if I lend to people who are considered riskier. The A* market is the safest and I have no bad payers in that market or the A market. I have half a dozen late payers in the B market.

Most have perhaps changed their jobs or even lost their jobs and they can’t be blamed for that. I do need to have some confidence that people will pay me back the money they borrow and that’s why there are credit checks done. Some people with a record of paying back loans or who are house owners and have assets to cover their loans are a better risk. People in the riskier markets wanting to borrow have to pay higher interest rates, up to 10% at the moment.

It’s the same for governments, reference agencies rate them and Greece has a bad rating so are paying a higher interest rate than the UK or Germany. The references agencies and banks downgrade them and they then have to pay more to borrow money.

If you want to borrow on a credit card, the interest rate can be as low as 7% if you have a good credit rating and as high as 60% if you have a bad credit rating. Other loans to people who are considered high risk are loans like pay-day loans with eye watering interest rates of over 3,000%.

Is it fair to make people who need the money the most, pay the highest interest rates? It seems unfair to me, but it’s all about confidence. If the Greek government had gold in the bank to back up it’s loans, then lenders would be more confident. As it is, it’s asking lenders to write off debts and they only pay part of the loan back. It doesn’t inspire confidence does it?

People who own their own homes inspire confidence in lenders, who believe they can foreclose on the home. It isn’t easy to foreclose though and many of the loans are unsecured anyway. It’s not worth sending in the bailiffs these days either. Banks chase the loans for repayment, but are willing to take a loss; the high interest rate ensures that some people pay enough to cover the ones who don’t pay their loan back in full.

If you owe money on a high interest rate loan, you can quite often get it written off, if you have paid some of it. If the bank has made a reasonable return on the loan, they expect to lose some of interest due on it. However, next time you want a loan expect a really high interest rate and you’ll probably be refused for a credit card, except at a high interest rate too.

To keep borrowing costs down, try to inspire confidence, never make late payments on loans, keep a reasonable balance in your bank account and never go overdrawn. Having a few investments will help convince the bank you’re credit worthy too. Put yourself in the bank’s position. Would you lend someone like you money?

Please comment if you have something to say or a question.

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