Different borrowers offer the loan at different rates. The topic of interest rates of loan is increasingly heating up in the loan market. The interest rates charged from the borrower depends upon his credibility and capability. However, it may get affected by certain other factors apart from the borrower’s credentials who are applying for a loan.
You can take a quick look at the numerous factors that the lender consider while deciding the interest rate for you.
Some of the top five factors that affect loans interest rate are as follows:
1. Credit Profile and the Payment History:
Payment history of the borrower includes 35 percent of your credit scores. So, to maintain your good credit history, it is essential to pay the loan installment and rent payment on timely basis. Payments late till 30 days or more can affect your credit scores and reciprocally will charge you higher rates of loan in future. Level of your credit profile will decide the interest rate of loan charged on you. The worst credit scores you have, the more interest rates you will be charged and the other way around.
2. Terms of Loan:
The term or duration of loan plays a vital role in determining the interest rates to be charged on loan. The loan with short duration is often charged with higher interest rates as it does not have any asset to compensate in case of non repayment of loan. Short term loans are much harder to predict as because of inflation and fluctuation in interest rates. However, loan with longer duration are available with lower interest rates because of accessibility of having an asset to compensate with the risk.
3. Collateral or Security:
If the borrower offers a home or any physical asset against the borrowed amount, the interest rates charged on the loan will be comparatively lower than unsecured loans. Placing a home as a security will let you get a loan at lower interest rates rather than just holding a credit card as credit cards are subject as a risk factor for the lender. Mortgage loans are available at low interest rates with the availability of tangible asset (home).
4. No Documentation:
For the convenience of the borrowers, lenders allow the borrower to apply for a loan without providing any documentation at all. With the increase in convenience of the borrower, it may increases the risk of the lender too. Thus, to balance the convenience of borrower with the lender’s risk, the loan will be availed at slightly higher interest rates.
5. Market Conditions and Government Lending Charges:
Certain factors of market conditions such as Federal Reserve Board (FRB), Inflation Pressures, and International Forces have the authority to raise or lower down the interest rates of loan. Mortgage rates are determined regularly in dynamic public market. Inflation is basically changes in price of economy that lead the interest rates to rise. When the economy is slow, the interest rates will automatically fall down and vice versa.
Conclusion:
To choose the best rate loan deal, you just have to rigorously look out for the loan programs offered by credit unions, banks, government lending and mortgage brokers etc. It is advised to shop around online financial market to find the most effective loan deal for you!