Personal Loans - How Do They Figure What Rate I Should Have?

Sept. 19, 2011 - PRLog -- Unsecured personal loans can be used in a variety of ways. You can consolidate your debt, get car or home repairs, get a medical procedure done that you’ve been putting off, or even take a vacation. But before you take out that personal loan, you should understand that the rates you get are determined by several factors.

First of all, rates are determined by the rates in the general market, and market rates are influenced by the Federal Reserve. The Reserve loans money to banks, and the rate at which they do so depends on fluctuations in the economy. If the Reserve raises its rates, the banks and credit unions will follow suit, so that the business of lending money can be profitable. This is why it is said that with borrowing money, timing is crucial.

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Bank policies also play a role. Each bank carries its own policies that affect interest rates, and therefore each lender will offer different rates. This is why it pays to shop around to find the best deal.

One of the main factors that will affect your interest rate is your credit score. But this is one factor that you can exert some control over. When you apply for a loan, the lender will check your credit history and credit score. What the numbers reveal, along with your history, will directly impact the rate you are offered. A lower credit score means a higher rate, since a lender sees this as a greater risk. A good credit score means better rates.

If your credit score is low, you may want to spend some time examining your credit report to find out why. You can take steps to remove errors and work with creditors to remove items from your report. By doing so, your credit score will climb, and your reward will be lower interest rates when the time comes to borrow money.

Another factor is the amount of income you make. If a lender takes a look at your income, weighing in your debt, he will be looking to be sure you can afford to repay the debt. The higher the income, the less chance you’ll default on the loan.

And this brings us to the last factor: your debt. Lenders will look at your income, yes, but they also want to get a clear picture of your debt. They do this by comparing your income to your debt, and this gives them your debt ratio. The more debt you have, the less your chances are of getting the loan amount you want or need.

Bear these things in mind and do what you can up front to be prepared before you apply for that loan.

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