A surprising number of things can affect your rate.
When you apply for a personal loan, you will know if you are eligible to borrow and what rate lenders will charge you.
Being approved to borrow is obviously important, but the rate you are offered matters just as much as getting the loan approved. This is because your interest rate determines the cost of your loan. If a lender gives you a loan but only at a very high rate, it may not make sense to move forward.
Since your interest rate determines the costs of your loan, it’s useful to know what lenders consider when deciding what interest rate to offer you. There are four key factors that affect your personal loan rate, most of which you can control if you want to qualify to borrow at the most affordable rate possible. Here is what they are.
1. Credit score
Your credit score is one of the most important factors considered by lenders. It’s a three-digit score on a scale of 300 to 850, with scores above 670 generally classified as good or excellent credit.
If you have a very low credit score, you will probably be refused a loan. But if your score is low or fair, lenders may give you a loan but at a very high rate. If so, you may want to try building credit quickly before applying for a loan or applying with a co-signer who has a higher credit score so that your interest charges are more affordable.
A co-signer should agree to share legal responsibility for payment, so your lender may try to collect from them if you don’t pay. It’s a big responsibility to be a co-signer, but lenders will also consider their references, so you can lower your rate if someone with good credit is willing to vouch for you.
If you need help, our guide on how to rebuild your credit has tips on how to improve your credit score.
2. Amount borrowed
The amount of personal loan you want is also important. This is because lenders also consider your desired loan amount when setting your interest rate. There’s a simple reason for this: the more money you ask for, the more risk the lender takes in giving it to you.
Larger loans are riskier for several reasons. First, if you don’t pay, the lender is out of money. Second, when you take on a bigger financial obligation, there’s a higher chance that you won’t be able to meet it.
If you need to borrow a specific amount to reach your goal, there is not much you can do about the fact that you may have to pay a higher rate due to your large loan balance. But you should aim to borrow as little as possible to achieve your goals.
3. Refund period
Most lenders give you the choice of how long you want to take to repay your loan. For example, you might be able to choose between a three-year and five-year payment term. If you opt for a shorter payment term, chances are you will be offered a lower interest rate than if you choose a loan with a longer repayment period.
This happens for the same reason you pay higher interest to borrow more. Lenders think it is riskier to give you a loan for a long period rather than a short one. This makes sense because the longer you take to repay your loan in full, the more time there is for something to go wrong and interfere with your ability to pay.
Choosing the shortest repayment term possible can actually help you save on interest by helping you get a lower rate. and making sure not to pay interest for that long. Of course, the big downside is that each monthly payment increases as you shorten your repayment term – so don’t choose a loan term so short that there’s a risk you can’t afford the payments.
Check out our guide to the pros and cons of longer repayment terms to help you decide how much time you want to spend repaying your personal loan.
Your income can also affect the interest rate the lender charges you. Specifically, lenders look at income versus debt.
If you have a high income and don’t have many other obligations, you may be offered a lower interest rate because there’s less chance you won’t be able to repay your loan. Again, lenders set your rate based on perceived risk.
On the other hand, if your income is quite low and your payments can be difficult to make — especially if you already have a lot of debt — then you will probably be offered a loan at a high rate only if you have it. offered one at all.
While there’s not necessarily much you can do to control your income, you should try to avoid changing jobs if you know you’ll be applying for a personal loan soon. Indeed, having a longer income history shows more stability and is preferred by most lenders.
By trying to keep your source of income steady, borrowing as little as possible, choosing the shortest loan term possible, and aiming to improve your credit before applying, you should be able to qualify for a personal loan with a good rate. of interest – – or better.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.