Depending on your credit profile and your lender, the
interest rate and annual percentage rate (APR) for personal loans can
vary widely. Some loans, such as those from credit unions or banks,
charge very low interest rates for customers with good or excellent
credit. Conventional finance companies charge interest rates that are
higher than credit cards, especially to customers with poor credit.
Conventional personal loans have the advantage of being installment based, rather than on revolving credit. Payments made to installment loans
gradually reduce the principle on the loan until the loan is repaid in
full. In contrast, if you only make the minimum payment on a credit card
(which is a type of revolving credit), you could potentially make
payments for years without actually reducing the total amount that you
owe.
Some signature loans, primarily payday loans,
do not run conventional credit checks at all. Instead, payday lenders
compensate for fairly lax credit underwriting standards by charging
outrageously high interest rates that range well into three figures.
While payday loans are marketed as short-term quick fixes, these loans
can get very difficult to pay off in full, and can multiply quickly
until you owe more than what you originally borrowed. According to a
study published by the CFPB, the average payday borrower is on the cycle
for 5 months out of a year, with an average APR of 339%.
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