Some industries, such as payday loans, have been faulted for having high interest rates. However, even conventional lenders are beginning to hike their interest rates on credit card accounts without warning. There are many products that have been abused by banks, who claim the higher moral ground, that have literally devastated people's lives because of a rise in interest rates. The first of these was the adjustable rate mortgage, which literally caused the mortgage default crisis.
The Adjustable Rate Mortgage
Interest rates on adjustable rate mortgages were teaser rates far below what a fixed rate mortgage would allow. This gave people the opportunity to buy a much more expensive home with a smaller payment. However, the teaser rate would soon expire and a new payment balance was sent out. This happened quite repeatedly until the homeowner had little option, but to default on the loan.
Credit Cards
Now, the credit card balances are set to default for exactly the same reason, except that many cardholders did nothing to merit the increase. That's because banks can choose to change the interest rate without giving a reason and are much more resistant to lowering as many of them are bleeding money right now. Some rates can go up over 30%, an outrageous interest rate.
How Payday Loans Differ
A payday loan does have a high interest rate when compared to the amount of money that is being borrowed and the time to repayment (typically the next business cycle). But, since it is not meant to be revolving or long-term credit, it is a one-time deal, and not a life-long anchor. If a person misses repaying the amount on time, then it can balloon, just like any past due account. However, most loans are limited to $300 to $600, unlike a home loan or a credit card.
The Final Word on Interest Rates
So, while it's important to look at interest rates when taking out a loan, you shouldn't miss the repayment terms. You might discover that the terms are subject to change without notice and that is really the type of contract you want to avoid in this chaotic market.
