Simple-interest loans are used for houses, cars, education, boats, airplanes and other large purchases. Once the loan is signed, the buyer starts using the item and begins paying for the rented money until the loan is repaid.
The rental rate for money is agreed to by the buyer and lender.
- A house loan (mortgage) may cost 5% APR
- A car loan may cost 7% APR when borrowing from a bank, although borrowing from the automotive manufacturers may offer much better rates
- A credit card company may charge you 20% APR on money rented for long periods of time.
House and Car loans are typically secured by the House or Car. When the buyer stops paying the car/house loan, a lender can take the car/house back – they usually try and satisfy the remaining balance of your loan by auctioning it to someone else. If an auction doesn’t bring in enough money to cover the remaining debt, the buyer may be required to pay any remaining difference.
The ability to take your items back and sell them makes the loan less risky. When a credit card company lends money it is much riskier because they can’t take groceries back – that’s why they have to charge much more interest.