There is a distinct relation between credit and debt. If you wonder how it works for the money lenders when money changes hands then you must understand this relation. Ideally, when you think about money lenders the two types of images that come to your mind are the banks and other private lenders. However, there are other sources as well such as credit unions, cooperatives and even friends and family relatives.
Lending money to other people who need it is a good business provided you lend it to someone who has the ability and intent to pay it back to you. What you get as a bonus is the interest that you charge at a specific rate for the entire time period that the borrowers hold your money. This ideally is the income and source of sustenance of the money lenders.
At this point you may tend to think that how much a money lender can earn giving away thousands of dollars and charging a few percentages as interest. Well, you will be surprised at their income as it is all based on the volume of business. For example an interest of 10% on a sum of $1000 from one person will fetch only $100 in the end. But when a thousand people borrow $1000 and pay 10% interest it comes to a huge sum of $100,000. See the difference?
Deposits and Lending
The ability of banks and other financial institutions that deals with money lending usually depends on the deposits that people make. On these depositor accounts these financial organizations usually pay a very low rate of interest. However, when they lent out the same amount of money to a prospective borrower as loans and credit cards they will charge a much higher rate of interest on it as compared to that of the savings and money market accounts.
For example, a person depositing $1000 in bank may get 4 to 6 % interest but when the same amount is lent out it will fetch 10 to 18% or even more as interest depending on the type of loan. Therefore, the lenders usually have a huge scope to earn lots of money from such deposited amounts.
Concept of Money Lending
Now that you know that money lenders and banks charge a huge rate of interest on your loans, you may think that they are bad guys but actually they serve a purpose not only for you but for the economy of the country on the whole.
However, lending money is not a business devoid of risks. The fact that the lenders follow their basic interest to maximize their profits, it leads to several risks and therefore such lending comes with cautions and costs.
It is said that lending money makes the world go around. How? Consider yourself in a simple situation. Assume that you want to buy a car but do have enough money in hand or simply do not want to break your bank for tax concerns. In such a situation you may approach to a bank to get a loan for your car following the terms and conditions of the banks or the financial institutions mentioned in their official site such as. The bank charges a small fee called processing fee and issue a loan on interest for a specific period. This loan in turn serves a lot of purposes such as:
- It enables you to buy your car and keep your money in the savings account intact
- The dealer of the car will have more money now to employ more people
- The dealer will also have the scope to get more inventories
- The employees of the dealer will have income to spend on other goods from other businesses
- Other economies and businesses will have a chance to grow.
Therefore, the single car loan benefits so many people and different aspects of the economy.
Also Read: 7 Easy Ways to Make Money Online
The Borrowing Costs
It is your cost of borrowing that enables the credit market to survive. Therefore, it is elementary that you know and read the fine prints of the credit card agreements or when you borrow money. The elements of the loan agreement that you should know include:
- Interest: This is what you pay in return to gain access and enjoy the privilege of using the money of someone else. For credit cards it can be as high as 25 to 30 per cent and lower for other loans.
- Fees: There are different types of fees charged by the banks and other money lenders. For loans they charge processing fees, service charges for credit cards, annual fees for credit card holders, late payment fees on monthly bills and much more.
- Finance Charges: These are all those interest and fees taken together and expressed as Annual Percentage Rateor APR.
Figure out Your Interest
The APR is usually a yearly figure that you pay but the banks will not charge interest on your loan on a yearly basis. You will be surprised to know that interests on your loans are actually charged on a daily basis. The money lender whether it is a bank or any other offering you credit must disclose the APR to you as per the law which is why you must visit the websites such as and others to know about it. However, you can calculate it yourself as well if you are not explained properly.
Depending on the number of days mentioned in your loan agreement, you must divide the APR by 360 or 365. This will enable you to know about the periodic rate of interest that will be charged at a compound rate every day on your loan. A compound rate of interest means it will build up by itself.
The interest calculated each time as a percentage of your total amount of loan is now added amount of your loan and becomes the new total. On this total the interest will be calculated next time creating a vicious circle for the lender to make money on the lent amount. For more details please visit here.