Before the advent of credit cards, consumers could rely on personal loans to access shot term credits relatively easy. But what exactly is the persona loans? It starts by borrowing a fixed amount of money for a fixed period of time. What differentiates one loan from another are the interest rate and fees. This type of financial product was never too exciting for the banks because its nature is simple, transparent with expected gains. And then the credit card hit the stage.
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What Made Credit Cards so Lucrative?
Well, for one, people are prone to spend more money when they are using plastic. Even twice as much. Then, people rarely ask about the interest rate when they are applying for a credit card. Credit Cards have an aura of spending tools and easy life that follows it, and one never considers what happens if they are unable to pay the balance at the end of the month. Credit card rates are high, because companies that issue them recognize that lack of interest rate sensitivity in users. Basic credit card interest rates are higher than 13% and can reach 29% if you miss the payment.
As the third reason, people are often unable to pay the statement balance in full every month, because of that spending. Apparently 40% of Americans fail to pay their statement balance in full from month to month. Even coming short of $1 triggers the interest on the average daily balance. Credit cards remained profitable for the banks because people are willing to build up balances, not worrying about interest rates. Credit card businesses have receive returns above 20%. That is the reason why many banks let got their personal loan services, focusing solely on credit card loans.
Personal Loan Strikes Back
However, recently, a few US based startup loan companies recognized the gravity of the situation. The Federal Reserve report states that currently there is $885 billion of outstanding revolving debt. Their business goal is to offer people the chance to refinance their credit card debts from double-digit to much better interest rates.
These companies have made a plan of creating allow-cost operating model, with digitalized business activities and automated lending and customer service model. Then, they started crating marketplaces that would connect borrowers and investors. The lending companies’ interest lies in origination and the servicing. The result is an equilibrium price that benefits the investors with a much higher return, but also a more suitable interest rate for the borrower. One of those companies, claims to have reduced the average credit card interest rate refinance by 31%.
In addition, while banks have developed sets of underwriting rules, complex pricing models and punitive fees, these young personal loan companies capitalize on a completely transparent business model. This is an example how another startup loan refinancing company makes their approval criteria.
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A Good German Example
Traditionally, borrowing money has not been popular among German consumers. When forced to, though, they often prefer personal loans to credit cards. A loan gives them an opportunity to compare prices in advance and borrow only as much as they need. Also, this option allows them to set up a reasonable term for paying off the debt. When compare to personal loan market, credit card market takes an inconsiderable percentage.
What you can Do
If you are looking to refinance your credit card debt, take your time to compare options. Sites like MagnifyMoney give you a list of many lenders. You should pay attention to:
- Get the best interest rate & fee combo.
- Opt for a low cost term life insurance that covers all your needs, loan included.
The advent of small “low-cost” personal loan companies threatens to hurt a soft underbelly of credit card business. Most of their users are ex-credit card borrowers, who fled from high interest rates.