3 Factors that Determine Your Loan Interest Rate

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If you are looking to visit your bank and apply for any loan, it is essential to consider the interest rate the lenders will give you. Interest is the amount of money you pay on top of money you borrow from a lender. The lenders make profits from the interest the borrowers pay, and therefore, sometimes, the interest rate might be very high depending on different factors. 

The affordability of a loan mainly depends on the interest rate because the higher the interest rate, the more money you will pay your lender. Read through to understand the three factors that determine your loan interest rate.

  • Credit Score

Almost every lender must check the borrower’s credit score to determine if they are in a position to pay back the loan they apply to get. The credit score determines the borrower’s creditworthiness, which is determined by the number of debts, the number of accounts opened and not being used, and the repayment history of the previous loans. The consumer’s credit history determines their credit score, which is the most crucial aspect the lenders consider during loan applications. 

When borrowers have a higher credit score, they have a better chance of having a lower interest rate because it shows that they can pay their loans on time. For example, when the borrower has a lower credit score, the lender increases the interest rate or might also decline the loan application, indicating that the borrower can default the loan payment.

  • Personal Relationship with the Bank

Having a good relationship with a bank is essential as it can be a determining factor in the interest rate that one might get when they take a loan. For example, opening a savings account and a fixed deposits account helps a consumer have a good relationship with the bank. Their loyalty gives them the benefits of getting attractive interest rates when applying for a loan. 

According to the experts at SoFi, getting personal loans with low interest is determined by the consumer’s relationship with the institution. Most of the older loyal customers at SoFi Invest enjoy the benefits of common interest on their loans.

  • The Debt-to-Income Ratio

Consumers with a higher debt-to-income ratio have a higher chance of defaulting on the loan repayment. However, the debt levels tend to indicate the consumer’s cash flow most of the time. When a higher percentage of the borrower’s income is dedicated to paying debts and other expenses, they incur monthly. With less cash flow, most lenders would not risk giving out a loan, and if they do, they will give it at a very high-interest rate.

What to consider

It is essential to understand the different factors that affect how lenders determine the interest rates when customers apply for a loan. With this understanding, one can work towards achieving a fair interest rate with their banks by having a good credit score. They can also have a good relationship with their banks and ensure a good cash flow by paying off the debts on time to help have enough income to cater for the bills.

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