Question

By using the risk and return principles, please elaborate on how the following bank products have different interest rates?

1. Credit Card

2. Home Loan

3. Auto Loan

At least 350 words in total.

Thanks

Answer 1

The risk and return is directly related to each other, the higher the risk higher the return. Risk taken by an individual is based on his own interests and his ability to bear it for the higher returns expected.

1)Credit card: Credit card is given to employees and business person based on the salary and turnover they make. It works based on the credit score they have and depending on it they will be issued a card. The interest rate on credit card will be usually to 2% to 3% per month. There is no collateral for this so it is high risk that is reason the interest on it is also very high.

2)Home Loan: The interest rates on this is usually less and will be between 4% to 6% per Year . The reason for low interest rate is the home is considered as collateral and in the time of not payment of interest and principal the home will be taken back by the bank . Each person will be having different interest rates and this is based on the factors like home price, down payment, tenure of loan.

3)Auto Loan: This is the loan given for the vehicles and it can be any type . The interest rates on this is between 5% to 7%. The risk involved here is medium and the price of the vehicle usually depreciated year on year so the interest rate quoted for individual depends on his credit score in this case.