Hey, millennials. We know you’re all scouting around looking for the best loan offers available to get you through those tough financial times. But often, we choose a loan from many other personal loans and maybe other types of loans only to end up suffering more just to pay the interest rate.
But did you ever stop to wonder what puts your interest rate on the rise? Read on. We’ve got your back with this helpful blog post breaking down all the factors influencing your loan interest rate and how they work together to impact it. With a bit of insight and understanding under our belts, we can start working smarter…not harder so that no one gets burned by an unnecessarily high-interest loan.
Poor Credit History
Let’s start with understanding the basic flow of a lender. Every lender needs to make sure that you’re, well, credit-worthy of receiving a loan. To do this, they will check your past credit history and scores. If you have bad credit or no credit at all, then chances are your interest rate will be higher than someone with better ratings – this is to account for the extra risk the lender takes on by taking out a loan with you. Sometimes, lenders will ask for a cosigner or guarantor to ensure that you’ll pay the loan back.
The Amount Borrowed
This may not seem like something that would make an impact on the rate, but the amount of money you borrow can be a contributing factor to your interest rate. The more money you need – and the longer you’re taking to pay it all back – the higher rate you’ll have. On top of that, lenders will also look at the type of loan you’re asking for to determine your interest rate.
Length of Loan Term
The longer you have to pay off a loan, the higher the interest rate is likely to be. The reason for this is quite simple – if you’re taking more time to repay it, then the lender has to cover their costs for that period of time. A shorter loan term is much less risky for the lender and will end up with a lower interest rate. A report from the CFPB found that an average consumer can save up to $500 by opting for a shorter loan term.
Type of Loan
It goes without saying that the type of loan you choose also plays a role in determining your interest rate. Different types of loans have different interest rates – and that includes everything from personal loans, mortgages, car loans, student loans, and so on. The loan type will also affect the terms of the loan – like the repayment period, interest rate, and any applicable penalties or fees.
Collateral Assets
Aside from those four, if you are using collateral, such as your car or home, for your loan, then your interest rate will also be impacted. Collateral is a valuable asset that you put up to secure a loan from a lender, and if you can’t repay the loan, they would have the right to take possession of it. Because of this extra security for the lender, the interest rate on these types of loans is typically much lower than those without collateral.
With the financial landscape changing all the time, it’s important to understand how the different factors of a loan impact your interest rate. Knowing what goes into calculating your interest rate can help you make the best decisions when it comes to taking out a loan. Stay alert and stay informed – that way, you’ll always be one step ahead in ensuring you’re not paying too much.
