For loan borrowers, they know that interests do change. For instance, you may have borrowed a personal loan with an interest of 15% and paid it back. But after a while, borrowing the same loan results in the interest of 20%.
How is this possible and why do interests keep changing? Let’s get down to the answers.
Factors Affecting Interest Rates
- Credit Scores and Reports
A good credit score leads to a lower interest rate since the score shows you have a good history of repaying credits in time. A borrower with a less credit history is riskier since the lender doesn’t have adequate knowledge about his creditworthiness leading to higher interest rates.
To calculate the credit score, your credit report is closely examined. This means that every information about your credit cards, loans, and payment records is looked into which constitute your credit history. A good credit report will raise your credit score while a bad credit report reduces the credit score.
The good news is that you can still get a loan even with bad credit. To do this, look for favorable loans like the best online payday loans in Connecticut.
- Loan Term
The shorter the loan term, the less interest you incur. This is because of quick payments which lead to better rates although the monthly payments will be higher than long-term loans.
Long-term loans usually have lower monthly payments compared to short-term loans but the overall amounts will be higher. For long-term loans, the amount of down payment also matters. A large down payment will lower the interest since it shows your capability of refunding the loan.
Again, if you choose a loan with an annual or semi-annual payment plan, the interest rates will be higher.
- Collateral Involvement
A collateral is a valuable asset that a lender can access if you fail to pay the loan back. The collateral value must be equal to or exceed the loan amount for it to be considered.
Loans that involve collateral are called secured loans while the ones that don’t need collateral are called unsecured loans.
In general, secured loans have less interest rates than unsecured ones since the presence of collateral reduces the possible risks of losses.
- The Type of Interest Rate Used
Interest rate is classified into two types, namely:
- Fixed interest rate
- Variable interest rate
A fixed interest doesn’t change over time while a variable interest does change after some time. A variable interest is normally fixed during the initial period after which it increases or decreases depending on certain market factors.
- The Economy
A country’s economy plays a major factor in an interest rate increase or decrease. The Federal Reserve, also known as the Fed, is the Central Bank of America. According to the bank of America, they have two main goals of operation which include:
- To keep prices stable so that inflation doesn’t get out of control. – “If inflation is high, the Fed might try to slow down the economy and steady those prices by pushing interest rates up. When interest rates are up, people will reduce borrowing money leading to less spending.”
- To encourage job creation when employment is low – “When job creation is low, the Fed might encourage job creation by pushing interest rates down. When interest goes down, it will be easier for people to borrow money for various investments leading to job creations.”
What Can You Do to Get Better Interest Rates?
- Fix your credit score to range from 700 and above;
- In case of down payments, start with a large amount;
- Secure the loan with collateral;
- Negotiate the rates with the lender to get favorable terms.
Bottom Line
Getting to know the factors affecting interest rates will help you choose the right options for better rates.
