A surprising number of things can affect your rate, When you apply for a personal loan, you will know if you are eligible to apply for a loan and what rate the lenders will charge you.
Obviously getting approved to borrow is important, but the rate you are offered is just as important as the loan approval. That’s because your interest rate determines the cost of your loan. If a lender gives you a loan, but only at a very high rate, it may not make sense to move forward. Since your interest rate determines your loan costs, it helps to know what lenders consider when deciding what interest rate to offer you. There are four key factors that affect your personal loan rate, many of which you can control if you want to qualify to borrow at the most affordable rate possible. This is what they are.
1. Credit score
Your credit score is one of the most important factors that lenders consider. It is a triple digit score on a scale of 300 to 850, with scores above 670 generally classified as good or excellent credit.
If you have a very low credit score, you will probably be denied a loan. But if your score is low or fair, your potential lenders will give you a loan but at a very high rate. If that’s the case, you may want to think about trying to build credit quickly before applying for a loan or applying for a loan with a co-signer who has a higher credit score so that your interest costs are more affordable.
A co-signer would have to agree to share the legal responsibility for the payment, so your lender may try to collect from you if you don’t pay. Being a co-signer is a big responsibility, but lenders will also consider your credentials, so you can lower your rate if someone with good credit is willing to vouch for you.
If you need help, our guide on rebuilding your credit has tips on how to improve your credit score.
2. Amount borrowed
The amount of personal loan you want is also important. This is because lenders also take your desired loan amount into account when setting your interest rate. There is a simple reason for this: the more money you ask for, the greater the risk the lender takes in giving it to you.
Larger loans are riskier for a couple of reasons. First, if he doesn’t pay, the lender loses more money. Second, when he assumes a greater financial obligation, there is a greater chance that he will not be able to meet it.
If there is a specific amount that you need to borrow to achieve your goal, there is not much you can do about the fact that you may have to pay a higher rate due to your large loan balance. But you should try to borrow as little as possible to achieve your goals.
3. Reimbursement period
Most lenders offer you the choice of how long you want to take to pay off your loan. For example, you may be able to decide between a three-year and a five-year pay period. If you opt for a shorter repayment term, you will most likely be offered a lower interest rate than if you choose a loan with a longer repayment period. This happens for the same reason that you pay higher interest to borrow more. Lenders think it is riskier to give you a loan for a longer period than a shorter one. That makes sense, since the longer it takes to pay off your loan in full, the more time there will be for something to go wrong that interferes with your ability to pay.
Choosing the shortest repayment time possible can really help you save on interest by helping you get a reduced rate and by making sure you’re not paying interest for that long. Of course, the big disadvantage is that each monthly payment increases when you shorten the repayment time, so do not choose a loan term so short that there is a risk that you will not be able to pay the payments. Check out our guide to the pros and cons of longer payment terms to help you decide how much time you want to spend on your personal loan payment.
Your income can also affect the interest rate the lender charges you. Specifically, lenders look at income relative to debt.
If you have a high income and do not have many other obligations, you may be offered a lower interest rate because there is less chance that you will not be able to pay your loan. Again, lenders set your rate based on perceived risk.
On the other hand, if your income is quite low and your payments can be difficult to make, especially if you already have a lot of debt, then you would probably be offered a loan only at a high rate if one were offered at all.
While you can’t necessarily do much to control your income, you should try to avoid changing jobs if you know that you will be applying for a personal loan soon. That’s because having a longer income history shows more stability and is preferred by most lenders.
By trying to keep your source of income stable, borrowing as little as possible, choosing the shortest loan term you can afford, and trying to improve your credit before applying, you should be able to qualify for a personal loan with a good interest rate. . – or better.