- Top 6 Factors that affect Your Personal Loan Interest Rate – Finance Buddha Blog | Enlighten Your Finances
- Certain Factors that Affect your Personal Loan Interest Rates are:
- 4 Factors Affecting Personal Loan Rates Outline
- 1. Credit Score
- Employment History and Personal Income
- Debt-to-Income Ratio
- 4. Loan Term
- Seven factors that determine your mortgage interest rate | Consumer Financial Protection Bureau
- 1. Credit scores
- 2. Home location
- 3. Home price and loan amount
- 4. Down payment
- 5. Loan term
- 6. Interest rate type
- 7. Loan type
- One more thing to consider: The trade-off between points and interest rates
- Now you know
- We’ve got a lot of information to help you get started
Top 6 Factors that affect Your Personal Loan Interest Rate – Finance Buddha Blog | Enlighten Your Finances
Have you applied for a personal loan recently or you are in a process to apply for it, in such a situation, the thing that you should consider first is the Interest Rate on which your personal loan will be approved.
Interest rate plays a very important role in any kind of loan. It is the one decides the total cost of your borrowing. Moreover, the interest rate on which personal loan is offered is always higher than other loans. This is because the personal loan is an unsecured loan and lenders are at more risk as they don’t have any collateral or security to back up them.
Top 3 Lenders with Lowest Personal Loan Rates
A personal loan is offered by different banks, and interest rate associated with it also varies from bank to bank. Hence, it becomes very important to compare the interest rate of the leading public and private sector banks, before you go with a particular lender. However, the interest rate depends upon various criteria.
Moreover, different banks have different criteria in terms they offer the rate of interest for the personal loan. This criteria also differ whether you are salaried or self-employed individual.
Certain Factors that Affect your Personal Loan Interest Rates are:
Your Repayment History
Your repayment history says a lot and hence plays a very important role in determining the rate of interest for your personal loan. Lenders can check for your repayment history through your CIBIL. Basically, a CIBIL contains all the validation of your past financial borrowings (loans and credit cards).
When a borrower makes payments for their loans, this is reported to the credit unions by the lenders. Similarly, when one defaults with the payments that is also reported to CIBIL. these reports by the lenders, credit unions prepare the credit history of borrowers, known as CIBIL score.
Before approving any new loan application lenders first check for the CIBIL score of the applicants. A low CIBIL is always considered bad and lenders are not willing to lend their money to such applicants.
In some cases, applicants with a low CIBIL may get approved for a loan but the interest rate charged to them is always high in such case. This is done to minimize the risk involved to the lenders.
Therefore, try to have a clean slate in the case of repayments. A good credit score can ensure a reduction in the interest rates, which can save your money.
Individual Skill to Negotiate
If you already have an account from a long time with the same bank from where you have applied for a personal loan, then it is quite obvious that you are an esteemed customer of the bank.
And if you have maintained a good relationship with the manager or the bank staff, then you can negotiate with the bank on interest rates, fees, etc it. Depending upon your negotiation skills, ask the bank for special offers or a reduced interest rate.
It is possible that you may get the best deal- either a reduced interest rate of some interesting offer.
Best Personal Loans of 2019
The income of a loan applicant significantly affects personal loan eligibility as well as personal loan interest rates.
A high-salaried individual is at a safer point for offering personal loans online as compared to the individual with low income.
As per the lenders, the income of a loan applicant is directly proportional to the repaying capacity of the loan. The person with a high income is ly to be more capable to repay the loan as compared to the others with low income.
Hence, to minimize the risk, lends may offer loan to a low salaried individual at higher rates.
Your Employer’s Reputation
The reputation of the employer with whom you work also plays an important role in determining your personal loan interest rate.
When you are employed with more renowned and stable your organization, you are charged a lower rate of interest for your personal loan.
This is because banks consider employees of reputed organizations to have a stable career, hence a stable income.
Similarly while working in a small company or start-up, when you apply for a personal loan the interest rate charged is comparatively higher, as the lenders consider that they don’t have much stable career and hence income.
The Tenure Period & Loan Amount
The tenure period & the loan amount which you decide for your personal loan also play an important role, which the interest rate for your personal loan. The higher the loan amount & tenure, the lower will be the interest rate and the same implies for vise-Versa.
Step-wise Guide to Personal Loan Prepayment
Your Debt to Income Ratio
You may have a high income and maybe working with a reputed company as well. But what if you already have so many loans on you.
Let’s understand this with an example- Dheeraj is a young professional working in a CAT A MNC in Bangalore. His monthly salary is ₹ 1, 00,000. He applies for a personal loan and gets rejected for it. You must be thinking why so? His profile is good only, they why did the lender disapproved him for the personal loan.
This happened because of inquiring the CIBIL, the lender gets to know that Dheeraj is already having so many loans on him.
He has an ongoing Home loan, car loan, personal loan as well as he has 2 credit cards which have a huge outstanding bill on it to be paid. In such a scenario, the total EMI which he is paying is exceeding 60% of his monthly salary.
Hence the lenders consider lending to him risky stuff, as he may not be able to default with EMI as he is already overburdened.
Top 5 Benefits of Applying Personal Loan Online
Now you must be clear about the factors that affect personal loan interest rates. Hence when you consider applying for a personal loan check for the above-mentioned points before you apply. Also remember, different banks offer personal loan at a different interest rate, so don’t forget to compare them before you apply.
4 Factors Affecting Personal Loan Rates Outline
Life can take some unexpected turns — some of which leave you needing extra cash. Maybe there’s a medical emergency, an urgent home repair or you’ve decided to work on managing your high-interest debt. A personal loan can help provide the financial flexibility you need. And if your credit health is strong, it could be a smart financial choice.
Applying for a personal loan can also be new territory, especially if you’re not familiar with things why interest rates might vary from lender to lender.
So before you commit to a lender, we’ll help you understand what factors might influence those rates.
That way, you can make a better informed decision when choosing a lender and perhaps have a more realistic view of the rates you could be eligible for.
1. Credit Score
While credit score is not the only measure by which lenders make loan decisions, it may be the primary factor that determines your personal loan rate. Your credit score is calculated using data from your credit reports to assess your creditworthiness or, the lihood that you’ll repay your loans in a timely manner.
It takes into consideration your repayment history, credit utilization, the length of credit history, credit mix and any new credit. Most credit scores range between 300 and 850; the higher the number, the better you’ll look to potential lenders. It’s important to have an idea of the state of your credit health before applying for a personal loan.
At the very least, this will empower you with the knowledge to take control of your financial situation if necessary.
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Something else which could impact your credit score is whether a lender does a hard inquiry or a “hard” credit pull that is visible to other creditors And keep in mind that a hard inquiry might stay on your credit report for up to two years. Some lenders allow you to check your rate, triggering a “soft” credit inquiry that will not impact your credit score and will not be visible to other creditors.
Learn more about credit pulls.
Employment History and Personal Income
Other factors that contribute to determining the rate are your annual income and employment. A borrower with a good track record of employment and significant income may be seen as posing less credit risk.
Some lenders have minimum income requirements. Be sure to understand those requirements as you compare loans and rates.
Regardless of the amount of your salary, the key is to understand what you can afford to pay monthly.
Your debt-to-income (DTI) ratio compares your recurring monthly payments to your gross monthly income, and is expressed as a percentage.
For example, if your gross income is $63,500 (before taxes) and your debt totals $25,000, then your DTI is 39.4 percent. The debt may include your mortgage or rent, credit cards and other loans.
Your minimum monthly credit card payment is used to calculate DTI rather than the full balance owed.
Knowing your DTI is essential to the loan application process as it can make a difference in your rate eligibility.
Read More about DTI
4. Loan Term
The amount of time agreed on by both parties for the repayment of the loan is referred to as the “loan term.” The term can vary in length and different lenders offer different loan terms. Your monthly payments will be calculated your loan term.
A longer term means that less money is paid each month, which makes it seem the more attractive option. But it might end up being more expensive overall because interest accumulates for a longer period of time.
In some cases, borrowers can also choose to make more than the minimum required payments and pay off the loan earlier, minimizing interest costs, regardless of the loan term. Find out if there’s a penalty for making extra payments or paying early in case you want to go that route.
Whatever you decide, read the fine print carefully and ensure that the term length and repayment amount is one that you can comfortably manage.
Knowing about the factors that affect personal loan rates gives you a better chance to assess your credit health and take steps to improve your creditworthiness before you apply for a personal loan.
Better credit health should result in more favorable rates.
Every lender has its own process, so it is important to do research and compare personal loan rates and terms from multiple lenders before making a decision.
Learn more about checking your rates and find out how to apply for a Discover personal loan designed around your needs.
Seven factors that determine your mortgage interest rate | Consumer Financial Protection Bureau
If you’re most people, you want to get the lowest interest rate that you can find for your mortgage loan. But how is your interest rate determined? That can be difficult to figure out for even the savviest of mortgage shoppers. Knowing what factors determine your mortgage interest rate can help you better prepare for the homebuying process and for negotiating your mortgage loan.
Your lender knows how your interest rate gets determined, and we think you should, too. Our Explore Interest Rates tool lets you plug in some of the factors that affect your interest rate. You can see what rates you might expect—and how changes in these factors may affect interest rates for different types of loans in your area.
Even saving a fraction of a percent on your interest rate can save you thousands of dollars over the life of your mortgage loan, so it definitely pays to prepare, shop around, and compare offers.
Armed with information, you can have confident conversations with lenders, ask questions, and understand your loan choices. Interest rates, just gasoline prices, can fluctuate from day to day and from year to year.
While movement in the interest rate market is outside of your control, it makes sense—just with gasoline prices—to gain awareness about what’s typical.
This way, you’ll have a sense of whether an interest rate quote you receive appears to be in the range of typical rates, or if you should ask more questions and continue to shop around.
1. Credit scores
Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores.
Lenders use your credit scores to predict how reliable you’ll be in paying your loan.
Credit scores are calculated the information in your credit report, which shows information about your credit history, including your loans, credit cards, and payment history.
Before you start mortgage shopping, your first step should be to check your credit, and review your credit reports for errors. If you find any errors, dispute them with the credit reporting company.
An error on your credit report can lead to a lower score, which can prevent you from qualifying for better loan rates and terms.
It can take some time to resolve errors on your credit reports, so check your credit early in the process.
Enter your credit score range into our Explore Interest Rates tool to get information on the rates available to you. If you don’t know your credit scores, there are many ways to get it.
You can also experiment with the tool to see how you might save more on your mortgage interest rate with higher credit scores. Learn more about things you can do to raise your credit scores.
2. Home location
Many lenders offer slightly different interest rates depending on what state you live in. To get the most accurate rates using our Explore Interest Rates tool, you’ll need to put in your state, and depending on your loan amount and loan type, your county as well.
If you are looking to buy in a rural area, our Explore Interest Rates tool will help you get a sense of rates available to you, but you’ll want to shop around with multiple lenders, including local lenders.
Different lending institutions can offer different loan products and rates.
Regardless of whether you are looking to buy in a rural or urban area, talking to multiple lenders will help you understand all of the options available to you.
3. Home price and loan amount
Homebuyers can pay higher interest rates on loans that are particularly small or large. The amount you’ll need to borrow for your mortgage loan is the homeprice plus closing costs minus your down payment. Depending on your circumstances or mortgage loan type, your closing costs and mortgage insurance may be included in the amount of your mortgage loan, too.
If you’ve already started shopping for homes, you may have an idea of the price range of the home you hope to buy. If you’re just getting started, real estate websites can help you get a sense of typical prices in the neighborhoods you’re interested in.
Enter different home prices and down payment information into the Explore Interest Rates tool to see how it affects interest rates in your area.
4. Down payment
In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it—you’ll usually get a lower interest rate.
If you cannot make a down payment of 20 percent or more, lenders will usually require you to purchase mortgage insurance, sometimes known as private mortgage insurance (PMI). Mortgage insurance, which protects the lender in the event a borrower stops paying their loan, adds to the overall cost of your monthly mortgage loan payment.
As you explore potential interest rates, you may find that you could be offered a slightly lower interest rate with a down payment just under 20 percent, compared with one of 20 percent or higher. That’s because you’re paying mortgage insurance—which lowers the risk for your lender.
It’s important to keep in mind the overall cost of a mortgage. The larger the down payment, the lower the overall cost to borrow. Getting a lower interest rate can save you money over time.
But even if you find you’ll get a slightly lower interest rate with a down payment less than 20 percent, your total cost to borrow will ly be greater since you’ll need to make the additional monthly mortgage insurance payments.
That’s why it’s important to look at your total cost to borrow, rather than just the interest rate.
Make sure you are factoring in all of the costs of your loan when you are shopping around to avoid any costly surprises. You can use our Explore Interest Rates tool to see how different down payment amounts will affect both your mortgage interest rate and the amount of interest you’ll pay over the life of the loan.
5. Loan term
The term, or duration, of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments.
A lot depends on the specifics—exactly how much lower the amount you’ll pay in interest and how much higher the monthly payments could be depends on the length of the loans you're looking at as well as the interest rate.
Learn more about your loan term, and then try out different choices with our Explore Interest Rates tool to see how the length and rate of your loan would affect your interest costs.
6. Interest rate type
Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period the market.
Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly later on. Learn more about interest rate types and then use our Explore Interest Rates tool to see how this choice affects interest rates.
7. Loan type
There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Lenders decide which products to offer, and loan types have different eligibility requirements. Rates can be significantly different depending on what loan type you choose. Talking to multiple lenders can help you better understand all of the options available to you.
Learn more about the different types of mortgage loans in our “Buying a House” tool.
One more thing to consider: The trade-off between points and interest rates
As you shop for a mortgage, you’ll see that lenders also offer different interest rates on loans with different “points.”
Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs.
- Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.
- Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate. Keep in mind that some lenders may also offer lender credits that are unconnected to the interest rate you pay—for example, a temporary offer, or to compensate for a problem.
There are three main choices you can make about points and lender credits:
- You can decide you don’t want to pay or receive points at all.
- You can pay points at closing to receive a lower interest rate.
- You can choose to have lender credits and use them to cover some of your closing costs but pay a higher rate.
Learn more about evaluating these options to see if points or credits are the right choice your goals and financial situation.
Now you know
It’s not just one of these factors—it’s the combination—that together determine your interest rate. Everyone’s situation is different, which is why you can use our Explore Interest Rates tool to see what you can expect your personal factors.
By understanding these factors, you’ll be well on your way to shopping for the right mortgage loan—and interest rate—for you and your situation. Not all of these factors are within your control. But understanding how your mortgage interest rate is determined will help you be more informed as you shop for a mortgage.
- Use the Explore Interest Rates tool to help you decide what’s right for you.
- As you consider your budget and make decisions about things your down payment amount and home price, check the Explore Interest Rates tool often. The more you know, the more accurate the rates will be.
- As you start talking to lenders, compare their offers to the rates in the tool—and to offers from other lenders—to see if you are getting a good deal and to help negotiate the best deal for you.
We’ve got a lot of information to help you get started
If you’ve decided now is the right time to buy, our tools and resources can help you get started.
- Get a copy of Your Home Loan toolkit for an overview of the process and some tools to help you define what affordable means to you.
- Visit Owning a Home to help you navigate the process from shopping for a mortgage all the way to closing.
- Check out Ask CFPB, our database of common financial questions.
Editor’s note: This post was originally published on January 20, 2015. We’ve updated it to provide more comprehensive information and to include updated links to our Owning a Home tools and resources.