What Criteria Do Lenders Use To Calculate Loan Rates

Many lenders will lend you money if "secured" with collareral such as e real estate, vehicles or other personal property. Signature loans however are based on just the borrowers word to pay back the loan and their credit score, no assets secure the loan. It is because of the fact that there is no security in the form of collateral for the lender that interest rates and fees are higher on signuture loans.

How lenders calculate your actual interest rate and fees varies from lender to lender, but all lenders carry some things in common when it comes to setting an applicants interest rate. The amount you are looking to borrow, the length of time you are seeking to pay back the loan and your credit score are key factors. If you already do business with or have done business in the past with the financial institution this too could play a variable in deciding your interest rate and terms.


Lenders need to pay special attention to your borrowing behavior and other financial information. The lender will pull your credit report, resulting in a hard inquiry on your credit report. The lender will see not only your credit score but what your debt to income ratio is as well as any outstanding debts or past due debts that you have outstanding. Your payment history here is key such as your repayment of credit cards, mortgages, lines of credit and other secured or unsecured loans. The better your payment history is and the lower your debt to income ratio is the more likely it is that you will recieve favorable rates on your unsecured loan.

The amount of cash that you borrow will also effect your interest rates. Low dollar amount loans tend to get pegged with higher interest rates so that the lender can make money. There is less money to be made on loans under $10,000.00 so expect to pay more for these type of loans. Loans over $10,000 and between $35,000 tend to have lower interest rates and longer repayment terms due to the income generated by a larger loan. Interest rates can be up to 2.5% less on loans over $10,000.00.

The terms of your loan, or how long you take to pay back the loan will also have an impact on your interest rates, but not as much as the other factors listed prior to this. Personal loans tend to have 1 to 5 year repayment terms. Loans of only 1 year have a lower interest rate, and this rate will increase slightly for each additional year. This is due to a slightly increased risk of default per year that the loan is outstanding.

You can often get deals by applying for a personal loan at the bank you already do business with or a credit union. Some lenders today also offer better rates for setting up auto payments for your loan payments as this reduces their risk of not being paid on time. Personal loans are great for those who do not want to tie up collateral, but those who want the best interest rate possible would likely find better rates with a secured loan. Your best bet to get the best possible rate is to rate shop by receiving multiple online loan quotes.

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This article was published on 15 Apr 2015 and has been viewed 1475 times
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