Why interest rates differ significantly between banks and card loans when borrowing money

When you look into borrowing money,

you might notice that banks offer relatively low interest rates,

while card loans are around 15-18% per year.

Have you ever been surprised by such a difference?

Even though you are borrowing the same amount of money,

why are the interest rates so different?

Hello, I'm Mitsuki.

In this article,

the reasons why interest rates differ significantly between banks and card loans

will be explained.

First of all, what is an interest rate?

An interest rate is like a usage fee you pay when you borrow money.

For example,

if you borrow 1 million yen at 10% per year,

about 100,000 yen in interest will accrue over one year

(the actual interest amount varies depending on the repayment method, etc.).

In other words,

the higher the interest rate, the more interest you are likely to pay.

Checking the interest rate before borrowing is very important.

What kinds of ways are there to borrow money?

There are several ways to borrow money, including:

・Bank card loans
・Consumer finance card loans
・Credit card cash advances

and so on.

Generally speaking,

many bank card loan products offer lower interest rates,

while consumer finance card loans and cash advances are often set at higher interest rates.

So,

why is there a difference?

Comparing bank and card loan interest rates

Bank card loans

often feature products with annual rates of around 2 to 15%.

On the other hand,

consumer finance card loans

frequently apply interest rates of around 15 to 18% per year.

However,

the actual interest rate is determined by factors such as the loan amount and the user's credit status, so it varies from person to person.

For example,

even when borrowing 1 million yen,

a difference of just a few percent in the interest rate can lead to a significant difference in the interest paid.

The larger the loan amount and the longer the repayment period,

The difference becomes even greater.

Why are interest rates different?

One reason is

the difference in the risk of default.

Banks

tend to conduct screenings relatively carefully.

Therefore,

it is easier to keep the risk of non-repayment low,

and they may be able to offer loans at relatively lower interest rates.

On the other hand,

consumer finance card loans

often include products that are relatively speedy from application to borrowing.

Because of this high convenience,

taking into account the risk of default,

interest rates may be set higher.

Also,

while banks lend funds based on deposits and the like,

there is a difference in the funding mechanism compared to consumer finance companies.

These differences are also

one of the reasons why a gap in interest rates arises.

Points to consider other than interest rates

When choosing a lender,

it is not recommended to look only at the interest rate.

For example,

・Screening speed
・Borrowing limit
・Repayment method
・Ease of early repayment

are also important.

Some people need funds in a hurry,

while others want to keep interest costs as low as possible.

It is important to choose a lender that suits your situation.

What happens when interest rates are high?

The higher the interest rate,

the more interest you are likely to pay.

As a result,

the repayment period may become longer,

or the principal may not decrease easily.

In particular,

if you repeatedly borrow,

the repayment burden may increase.

Before borrowing,

not only the monthly repayment amount,

Total repayment amount should also be checked.

Things to check before borrowing

Before borrowing money, make sure to check:

・Is this expense truly necessary? ・Can you repay it comfortably every month? ・What will the total repayment amount be?

Make sure to confirm these points.

Borrowing money itself is not inherently bad.

Depending on the purpose, such as for a mortgage or education loan,

borrowing can be useful.

What is important is

to use it after creating a manageable repayment plan.

Summary

The reason there is a difference in interest rates between banks and card loans is

due to differences in default risk, screening criteria,

and funding mechanisms.

Also,

the actual interest rate varies depending on the loan amount and the borrower's credit status.

When borrowing,

it is important not to look only at the interest rate,

but also to check the repayment plan and the total repayment amount.

Thank you for reading to the end!

On this account,

I share knowledge about money and investing in an easy-to-understand way.

I would be happy if you could follow me!