When it comes to getting great personal loan rates, it’s true that the better the interest rate you secure on a loan, the less you’ll pay back in interest over time. When you understand how lenders determine your loan rate, you can be smart about getting the funds you need. It’s all part of financial planning, so make sure you do this right.
How Lenders Determine Your Loan Rates
There are several key factors that tend to affect the loan rates offered by lenders.
Your Credit Score
Lenders check your credit report, reviewing your credit score and credit history.
Shopping for personal loans for your credit score will save you a lot of time, effort, and inquiries on your credit report. Make sure you only take into account reputable lenders. But how can you know whether you can trust a lender? There are two ways. The harder one is to do your own thorough research. The easier one is to go to Loanry and see what we recommend. We partnered up with Fiona and they selected trustworthy lenders. If you’re interested, put in your information below to potentially get offers:
The Loan Amount You’re Requesting
The amount of money you’re borrowing affects loan rates. It’s always smart to borrow just what you need realistically. Borrowing too little can be defeatist in the sense that the loan amount does not adequately cover your needs. Conversely, borrowing too much is just unnecessary and ultimately, a waste of money.
Your Employment History and Salary
Most lenders check your employment history and salary. The most desirable personal loan rates i.e. those with the lowest interest rates and most attractive terms are reserved for people who demonstrate a steady job history and strong earnings.
Finally, lending terms differ widely among banks, credit unions, and private lenders. One lender may give you a much lower rate than another. Your local bank might be a great choice, since you’re established there. You should always be discerning about where you apply for loans, read the fine print, and remember accepting any loan offer is up to you. There’s no rule that says you have to take the first loan offer you get.
Personal Loan Rates for Your Credit Score
If you have a few months to prepare, you can improve your personal loan rates by first improvingyour credit score. To do this pay bills on time (and in full if you can). Also, avoid opening any new lines of credit, since doing so will likely trigger a temporary drop in your credit score. Don’t close any of those credit card accounts either, even if you don’t use them. Credit accounts that have been in existence for a longer period of time can contribute positively to your overall credit score and creditworthiness.
Sometimes new banks or private lenders offer great promotional APRs or waive fees. Do your research online to learn about typical APRs and fees offered by local and national banks and credit unions. In addition to banks, be open to alternative lenders. You might find better terms from payday loans or peer-to-peer loans than via bank loans, especially if you’ve had employment problems.
Beware – Read the Fine Print
Before you accept any offer, make sure to do the math, read the fine print, and add up any fees that come with the loans. Factor the repayment terms into your decision. In the long run, you might pay more with a large repayment window and a moderate interest rate — say, five years at seven percent, than for one with a short, one-year-window and a higher interest rate of 12 percent.
Be realistic when calculating repayment terms. For example, if you know you can’t afford more than the minimum payment, don’t try to tell yourself you’ll pay back the loan a couple of months early and save money doing so. Be honest with yourself. As for the math, online personal loan calculators can help you compare the rates, repayment terms, and fees so that you can tabulate how much each loan will cost you in the long run.
Once you’ve crunched the figures, you can borrow with confidence knowing you’re getting a competitive rate that suits your needs and circumstances.
Liya is a financial educator with a background in SEO focused content writing. She has been doing copy writing and blog creation for finance companies for over 5 years.