Why Interest Rates On Fast Loans

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Consumers who encounter a financial emergency often need to borrow money, but they typically need lenders to process their applications quickly. Cash-strapped borrowers may not have the ability to wait a week or more to receive the funds needed to repair the family car, pay for a spouse to visit a doctor or patch a roof that is leaking. Therefore, they often turn to fast loans online or through a storefront. Despite their immediate need, many borrowers wonder why the interest rates on fast loans are so high.

Why Interest Rates on Fast Loans Are High
To understand why fast loans carry such high interest rates, it might be helpful to review how a typical bank determines the interest rates it will charge. The first thing to remember is that
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Without considering risk, the lender could offer a loan with an interest rate of 8 percent and still earn a profit. Once risks are evaluated, however, the interest rate will rise.

How Greater Risks Affect Interest Rates on Fast Loans
Borrowers are individuals with different circumstances, which has always made the risk premium a challenging factor for lenders to assess. To minimize their risks, lenders put mortgage applications through a process known as underwriting. During the underwriting process, the lender verifies the applicant 's employment history, income and down payment. The borrower 's debts will be evaluated to ensure that all payments, including the mortgage payment, can be met. The underwriting process also includes a careful evaluation of the borrower 's credit history.

The underwriting process can take days or even weeks, according to FinWeb.com. Although most people think that lenders only send mortgage applications through underwriting, many banks also underwrite personal loans, business loans and home equity loans. Underwriting can help lenders determine the level of risk associated with each loan, but these certainly cannot be considered to be fast loans.

After evaluating the chances that the borrower will not make timely payments or may default on the loan, the lender can then assign a risk premium. In the example given in the previous section, the lender would be able to offer an interest rate of 8 percent plus the risk premium. If the
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