Factors that Influence Interest Rates on Loans

Loans come with not only different types of interest rates, but different factors which affect the rates. Two people taking out a loan for the same amount for the same purpose will pay different rates of interest on the identical loans in most cases. The factor which has the most influence over the interest rate you will be offered is your own credit history, with the most preferential interest rates reserved for those with excellent credit scores.

Your income plays no part in determining your interest rate, but your assets can. Secured loans which call for you to place an asset as collateral against the loan typically result in  lower interest rates than unsecured loans. Even if you do provide collateral then the interest rate will still be influenced by your credit score, which is why it is so important to establish and maintain an excellent credit history. Think of your credit score as your financial reputation and a good reputation always carries more sway than a bad one.

Not everyone who has no credit history has to pay a higher rate of interest as no credit history is not considered in the same light as a bad credit history. However without a credit history you are very unlikely to obtain a loan from a reputable lender unless you can provide a co-signer to stand guarantor. This is a requirement on most private student loans, but the credit score of the guarantor can then result in the borrower being offered a lower interest rate, as the co-signer is assuming equal responsibility for the debt.

When looking for a loan there are various types of interest to consider. Fixed rate loans are often the best choice over the long term as an interest rate is agreed on and this cannot be changed unless the borrower defaults on the loan.

Variable interest rates on the other hand are subject to market fluctuations so can change. High interest rises can result in a much higher monthly payment than anticipated, but there is also the possibility that interest rates will fall in which case the loan will cost you less as long as the lender passes the decrease on. Obviously if the variable interest rate rises your loan will immediately cost more as the lender will be quick to implement the change, whilst not always so quick to pass on any interest rate reductions.

It can leave the borrower in a quandary if there is a choice between opting for a variable or fixed interest rate as it is possible to fix too high and then only watch as interest rates fall. On long term loans a capped interest rate provides a solution to this, as the borrower is guaranteed that the interest rate will not rise above a certain level which is capped.

The final type of interest rate is one which no one wants and that is a penalty one, which can be imposed if payments are in default. More usually associated with credit card interest rates they can be levied when terms and conditions are broken, and can work out very expensive.

Without a good credit history you are not likely to have as much choice in the type of interest rate and may well find that you need to use sub prime lenders who typically charge higher interest rates. Pay day loans are very short term loans of typically less than a month, and those with no credit or bad credit often use the services of pay day loan lenders. However the APR quoted can still work out cheaper than borrowing over the long term from a bank, if the pay day loan is paid back as it should be with the next pay check.

Thus there are quite a few factors which influence the interest rate you pay on your loans, but the most important consideration is your credit history which is why it is so important to ensure it is unblemished.