If you’ve ever tried to compare personal loan rates before, you’ve undoubtedly noticed a wide range of interest rates. But what causes this variation, and how can you ensure you receive the best rate? This article will discuss six key factors that can impact personal loan rates.
1. Your credit score
A high credit score means you’re a low-risk borrower, which can result in lower interest rates. However, don’t let your credit score deter you from applying for a personal loan – there are still plenty of great options available if you have a poor credit score.
How to get the best rate: Work on improving your credit score before applying. Make extra payments on credit card debt to reduce your credit utilization and always ensure your payments are made on time.
2. The amount of money you’re borrowing
Larger loans tend to have lower interest rates than smaller ones because lenders believe they’ll be able to recover the entire amount of the loan in case of default.
How to get the best rate: Before applying for a personal loan, make sure you understand the amount of money you’re borrowing and try to borrow as much as you can afford.
3. The length of the loan
Short-term loans (those with a duration of fewer than 12 months) tend to have higher interest rates than long-term loans (those with a duration of more than 12 months). This is because lenders believe that there’s a higher risk that the borrower will not be able to repay the entire amount of the loan in time.
How to get the best rate: Try to choose a long-term loan if possible – this way, you’ll avoid having to pay high-interest rates throughout the term of your loan.
4. The lender’s lending criteria
Lenders have different lending criteria, which can impact your chances of receiving a good personal loan rate. Some lenders require applicants to have a good credit score and low debt levels, while others are more flexible and will approve loans regardless of your financial history.
How to get the best rate: Work with a lender with lending criteria that are in line with your own – this way, you’re more likely to receive a reasonable rate on your loan application.
5. The market conditions at the time you apply for your loan
The market conditions at the time you apply for your loan can also affect your rate – for example, if there are many applicants for limited amounts of available loans, banks may offer lower rates than usual.
How to get the best rate: Don’t wait until the last minute to apply for a personal loan – try to find out about current market conditions so you can plan ahead and ensure you receive the best possible rate.
6. The current Fed rate
The Federal Reserve is the central bank in charge of determining the market interest rate to offset inflation, reduce the chance of a recession, and promote economic growth. Their determinations affect the interest you receive on everything from your savings account to mortgages.
How to get the best rate: Check the current Federal Reserve rate before applying for a personal loan – this way, you’ll know exactly what interest rate you’re eligible for.
The bottom line
Personal loans are a great way to get the money you need – just be sure to compare rates and find the best deal.