5 Factors That Affect Your Interest Rate
When you take out a loan, the lender charges interest in exchange for loaning you the funds. The rate varies based on several factors, some of which you can control and some of which are beyond your control. Before you take out your next loan, you should understand how the following elements affect your loan rate.
1. Credit score
Your credit score is a numerical snapshot of your credit history. A high score indicates you've used credit wisely. A low score either means you've misused credit or not used enough credit to generate a higher score.
If the interest rates you see when you apply for loans are too high, you may want to take time to raise your score.
2. Job and income
In addition to looking at your past, lenders also look at your present. What do you do? How long have you been doing it? And do you earn enough to repay the loan?
If your situation seems risky, the lender will either reject the loan application or charge a higher interest rate to mitigate their risk.
3. The lender
Lenders charge different rates based on the borrower, but they also use different rates based on their operating model. Lenders that focus on high-risk loans, for example, tend to charge higher rates. Non-profit lenders like credit unions typically charge lower rates than banks or other institutions that need to turn a profit on their services.
4. The timing
The timing of the market also affects loan rates. When the economy is slow, the Federal Reserve often lowers interest rates to encourage consumers to borrow money. If wages are rising and inflation is increasing, the Fed may increase interest rates to combat inflation.
This rate directly affects what rates lenders extend to borrowers. The news has a lot of speculation about interest rates. If you anticipate an increase in interest rates, you may want to apply for a loan sooner rather than later when the rates go up.
5. Collateral
Collateral is an asset used to secure a loan. For instance, if you take out a car loan or a mortgage, the car or the property serves as collateral. If you don't repay the loan as agreed upon, the lender has a right to seize your collateral.
This may sound risky to you the borrower, but this is a common practice that actually helps to lower your interest rate. When banks feel more secure about a loan, they offer a lower interest rate. In contrast, if you take out a loan without any collateral, you should expect to pay a higher interest rate.
To learn more, contact a bank or credit union and apply for a loan today.