What justifies the high interest rates of banks?

The shortage of money, which was established during the economic crisis in our country, caused a general rise in the interest rates of banks. But after the storm, why do financial institutions continue to offer such high rates? In this post we give you the keys by which the traditional system maintains such high interest rates.

The rates, or interest rates, that apply to a loan depend fundamentally on the price of money. But there are other factors such as the duration of the loan, the rating (or the risk of the operation) and the credit history of the client, which are also essential to determine the rates of our loan.

Loan duration

cash

It is not the same to ask for a short term loan. The monthly credit return fee in the first case will be greater, having to return the money in less time. While in the second case, we will pay a lower percentage each month but the total cost of the credit will be higher.

Operating risk

money

Depending on the project for which we request financing, a higher or lower rating will be established depending on the risk of the operation. At higher risk, higher interests.

The customer’s credit history

The customer

The customer’s credit history, or delinquency, is another key factor in determining loan repayment rates. The better the customer’s history in relation to the payment of their bills, the lower the interest rate.

So why are the credit rates of traditional financial institutions so high? On the one hand, banks include in the loan the contracting of other products such as credit cards, insurance, etc.

On the other hand, the bank seeks to obtain the greatest possible margin to cover its high structure costs and compensate for possible insolvency cases. On many occasions, banks do not properly evaluate the people or entities to whom they lend the money. The cost that this entails translates into higher interest rates for other customers.

The market already offers cheaper financing alternatives than those offered by banks. An example is that of online platforms, based on crowdlending, which eliminate the costly structure of the traditional system and reduce the risk of non-payment of the investment, by approving only loans from solvent people. This allows to offer much cheaper interest rates, compared to the prices offered by the traditional banking system.