Why is it so hard to get a quality loan as an individual?

Question

Currently federal funds rate is 2%, this is about what it should cost for a bank to borrow money from the government. I doubt lending money costs them much more than this. Loans taken by corporations seem to be around 2.5-5.5%. So from this, it seems like money is reasonably cheap in the US today.

However I would be lucky to get offered even double these interest rates from a bank if I went in and asked as an "average Joe". I have excellent credit (no liabilities, no delinquency, all payments on time for years), but personal loans and credit cards I get offered tend to be at least 12-13%. This despite the fact that I have liquid assets on hand to cover these several times over. On top of this, borrowing is not flexible and easy at all, the loan applications often have complicated terms. At such rates, it's practically impossible to meaningfully leverage any business activity, since even if borrowing at 12% the business or investments must perform phenomenally to turn a profit on top of this interest.

I realize that whenever you loan someone money, you have to mark up the interest to cover the risk of them not paying. But corporations go bankrupt all the time too. Is an average person with steady income and good credit history really at that much higher risk of failing to repay so as to justify interest rates 2-10 times higher (compared to corporate)? Or is it just a case of the bank massively overcharging people because they have no alternative? Why can't ordinary people obtain modest loans at reasonable rates (which would make it realistic to use the money for investment, for instance)?

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Note: To clarify, I am asking about obtaining any sort of loan as a private person with intent to use it for investment purposes and generate a profit. So the money should come with few strings attached (not forced to use for a specific purpose like buying a car or house) and sufficiently low interest. Consider the nature of investment or business to be open ended, but let's say 7% annually before tax for the sake of the argument. Assume I have documented stable income, no outstanding debts (except for credit card statements which get paid immediately), my FICO score is 800, I have assets both liquid (eg. cash) and illiquid (eg. car, valuable possessions) comparable to amount of loan I am seeking.

Answer 1

Credit cards are unsecured debt. With good credit and a large down payment, secured loans such as mortgages can be as low as 3%. When a corporation goes bankrupt, the bank takes over ownership and gets all the future earnings of the corporation (And note that bankruptcy for a corporation doesn't mean "doesn't have any assets left". A bankrupt business can still be quite profitable.) Since slavery is illegal, the bank doesn't get to take ownership of you if you default. While they may get a portion of your earnings for a few years in a bankruptcy settlement, for the most part they don't get your future earnings.

But corporations go bankrupt all the time too.

Not well-established ones. Risky businesses are going to have higher interest rates.

I have assets both liquid (eg. cash) and illiquid (eg. car, valuable possessions) comparable to amount of loan I am seeking.

Then why don't you use those for the investment?

So the money should come with few strings attached (not forced to use for a specific purpose like buying a car or house)

If you put your assets up as collateral, then you're going to have strings. If you're not willing to put it up as collateral, why should the bank take it into account?

To clarify, I am asking about obtaining any sort of loan as a private person with intent to use it for investment purposes and generate a profit.

Why is it reasonable to expect a bank to take the risk of the investment and let you take the profit?

Answer 2

"Currently federal funds rate is 2%, this is about what it should cost for a bank to borrow money from the government. I doubt lending money costs them much more than this."

Yet you want the bank to loan you money with zero collateral (you want to invest it without strings such as the requirement to buy a car). The less collateral involved the more the risk.

You do realize that in the US banks are limited in how much they can borrow from the Federal reserve. The source of the funds they have to loan is the depositors. They set their rates for their loans to pay their expenses (people, equipment, rent ,electricity...) and to pay the interest on CD's, and savings accounts. Plus profit.

If you want to get a better rate on a signature loan, then find a bank with lower overhead, or lower profit. Such as an online bank or a credit union.

I can get a 6% signature loan for 24 months right now from my credit union.

Answer 3

I see "portfolio margin" at 3.9% interest. Cash can be withdrawn from the account but the minimum account size for portfolio margin is about $100000.

The average 15-year mortgage rate is presently at 3.99%.

The point is that these lower loan rates require collateral.

The best opportunity for a personal signature loan is a credit union that is affiliated with the place of employment.

Banks make revolving loans to businesses that they are familiar with. Of course many banks were formed by local or regional business persons wanting to make loans to local or regional businesses.

Answer 4

If you're talking about a signature loan on a prospect then I might suggest your approach to business credit is a bit off.

You can file as a LLC or DBA pretty easily at any county clerk's office. In some cases it's as cheap as $10. Take that certificate to a bank, open a business account, and you have the first steps to establishing yourself as a business entity.

As you maintain your business account, the bank has records of your own version of prosperity. Just having the account for some length of time reflects well on you as a venture. It helps to have cash flow, even if it dips at times. As you establish your business account, your credibility grows. It varies from one financial institution to another. But ultimately, you become a better investment for them, and your interest rates will reflect that. When you need a loan on a prospect, you are borrowing off the business, which then has a reputation and rapport with the bank. The terms have changed and they are no longer operating on your good word. Your interest rates will reflect how secure you appear on paper.

Why do corporations get a break? Others have said it, but to reiterate, they typically have assets to leverage their debts. If you're taking a private loan for investment, which sounds hellishly scary, what is your collateral to justify a lower percentage? They are investing in your competence, not the viability of your investments. It is perfectly logical that - without establishing yourself as a business and proving you bring in cash flow - you would be offered nothing less than a 2 figure APR. In my opinion, that's a generous offer considering your security is effectively "nah man, I promise"

Your 800 credit score shows you are a good consumer. Not even necessarily a responsible one. Just one who has used credit as it is designed, and you pay your bills. It does not reflect your business competence though. They are wholly separate worlds.

Answer 5

If you are borrowing to invest, you might want to look into margin loans from your brokerage instead of going to a bank. It sounds more like what you are looking for.

I checked the rates over at Schwab and they are running between 7.58% - 9.33% right now. It isn't in the 5's but it is way better than 12-13%

Another thing you may not be considering when comparing yourself to large companies, is that they have a lot of assets which can be seized in a bankruptcy. They also tend to have a much lower failure rate than sole proprietorships. You are simply a bigger risk and that is priced in.

Answer 6

With a good credit score, strong discipline, and some creativity ordinary people can get access to credit through introductory credit card offers. Many offer 0% interest on purchases for some period of time. If one directs spending to such a card, then the equivalent of the spent money remains available for investing during the interest free period. The interest free period can be potentially extended through the use of low or no cost introductory balance transfers to other credit cards.

Obviously, this approach is not without risk. It definitely should not be used by those who may not have the discipline to both manage the spending and accumulated debt on the cards and to pay things off or transfer the debt before interest kicks in.

Answer 7

Banks have a very low risk of default. You as an individual have a much higher chance of defaulting on your loan. If the loan is not backed by some sort of collateral (it is not uncommon to get car loans under 3%) Then the bank is taking on significantly more risk by lending you money, so to compensate for that risk they charge more interest.

You might have a great credit score, but you are lumped in with millions of others that also have a great credit score. Plus, people don't generally take out unsecured loans unless they have no other way to get the money, therefore, the fact that you are taking an unsecured loan is a signal that you have low liquidity and are at risk of default.

despite the fact that I have liquid assets on hand to cover these several times over.

Then why do you need to borrow money?

I am asking about obtaining any sort of loan as a private person with intent to use it for investment purposes and generate a profit

This is a terrible idea. Risk-free investments will have a return equal to what the banks can borrow money for, so you will not be able to borrow at that rate, and must choose investments with higher rates of return and more risk. At higher interest rates, the interest eats into your profits, and you are at significantly greater risk of losing it all if the investments turn against you and you can't afford to pay back the money.

Answer 8

12-13% for a personal loan seems unusually high for a loan at the moment. A major national bank's website is currently showing me 5.5-9% for an unsecured $10K loan (24 months, 760+ FICO). Unsecured personal loans are the riskiest types of loan to make so they generally have the highest interest rates. Loans that are secured by CDs or a savings account generally have much lower rates.

You mentioned that you have liquid assets on hand to cover the debt "several times over". I suggest shopping around your local credit unions. Many offer secured loans that are backed by a "share" (savings) account with very good rates. One of my local credit unions currently shows a share-secured loan up to $20k with an APR "as low as 1.55%". Loans like that tend to be the best of both worlds. You can still earn interest on your money while it's being used as collateral, and the credit union can offer you very low rates since you've significantly reduced their downside risk. Some credit unions also offer partially-secured loans, where you can borrow more than the amount of the secured asset.

You may also have other options depending on what specifically you're doing with the money. If you're opening or expanding a business, you might qualify for a special type of loan that's guaranteed by the federal government's Small Business Administration (thus lower rates for borrowers). If you're investing in an existing business, a credit union may be able to use some of your business's assets as security. That could bring your loan rates down and you still retain use of the assets.

A big part of the loan rates you get is your perceived ability to repay. Banks have actuaries that crunch the numbers based on a number of different factors. On something like a mortgage, how much income you bring in each month plays a big factor in how likely you are to be able to make the payments. When you take out a loan for business/investment purposes, they'll forecast how much profit your business is likely to make and calculate their risk based on that. A "no strings attached" loan means they have no information to go on; they'll have to err on the side of caution and assume the investment returns nothing, which means higher rates for you. The more they know about your business, the more they can refine their risk model and the lower they can drop their rates.