Loans are a huge help when it comes to making big payments. And it’s no surprise at this point that they are accompanied by interest. Interest rates are always changing from loan to loan, though. Why is that? It all comes down to different factors that lenders look at, so here’s how lenders determine your interest rate.
How Lenders Determine Your Interest Rate
Credit Score
First and foremost, your credit score and credit history will have the biggest impact on your interest rate. Your history shows how well you’ve paid your bills in the past. If lenders see that you haven’t done the greatest job of making your payments on time, they’re going to set it up so they’re safe. The higher your credit score, the lower your interest rate. The lower your score, the higher your interest rate.
Debt-to-Income Ratio
Debt-to-Income Ratio is a measure of your ability to pay back a lender. If you have a lot of money sitting in outstanding debt, then you don’t look very reliable as a borrower, which results in less attractive terms for you. The more income you have available in comparison to the debt, however, the more confident lenders will be that you will pay them back.
Amount Borrowed and Down Payment
Lenders also determine interest rates based on how much money they have to lend you. If you’re able to pay a large portion up front, that says to the lender that you will be able to pay back the loan with no problem. On the other hand, if you borrow a large amount of money, and don’t pay much up front, that’s a pretty big risk for the lenders. This will cause them to increase your interest rate to balance their exposure.
Length of Term
The shorter the term of the loan, the quicker the lender will get their money back. This will usually result in friendlier terms. While your shorter term may result in lower interest rates, your payments will likely be much higher. If you are hoping for a little more room to breathe with your payments, be prepared for higher interest rates. The lender won’t be getting their money back particularly fast, so they need to make sure they get their money back.
Age of Vehicle (Auto Loan)
If you’re going for an auto loan, the age of the vehicle will play a role in what your interest rate is. You will typically see higher interest rates for older cars than for newer cars. That’s not what you expected, right? You would think the newer cars would have the higher interest rates because they’re new and tend to be more expensive. Actually, that’s precisely why they have the lower rates. Older cars have already depreciated quite a bit, so it’s safer for the lender to increase the interest rate in case of unforeseen circumstances.
Purpose of Property (Mortgage Loan)
Lenders also take into consideration the type of property you want the home to be. If you plan to have it as a second home or rent it out to other people, your interest rate will be higher. Otherwise, if you plan to occupy the home yourself, your interest rate will likely stay low granted all other factors are satisfactory to the lender.
Do you have any questions regarding how lenders determine your interest rate? Let us know! We’re here to help. Give us a call today at 1-866-991-4885!
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