All types of loans come with costs. Lenders charge an interest rate for carrying a credit card balance or taking out a loan. Besides that, you may have to deal with penalties, late payment fees, and administrative fees as well.
Personal loans work as a form of installment credit. It means you will have to pay interest on the amount you borrow until the debt hits zero. If you decide to take out a personal loan, try to borrow at the lowest rate you can qualify for, particularly if you’re managing other financial issues.
In general, the interest rate you’ll get will vary depending on your loan repayment term, the amount, income, and credit score. But how do you know if you are getting a fair interest rate?
Factors Affecting The Rate You Receive
There is not one interest rate for all borrowers. Lenders usually modify interest rates based on these factors:
- Debt-to-Income Ratio. Lenders will check your total debt amount and how much income you yield. If the ratio is high, lenders might charge you a high-interest rate since you’re considered a risky borrower. A low DTI means you can still afford to take on a new debt, which conveys a lower interest rate.
- Credit Score. Borrowers with high scores are qualified for personal loans at better interest rates. In the lenders’ eyes, high credit scores correspond to less risk.
- Employment and Income. You will need proof of income to convince lenders that you can repay the money you are borrowing. Otherwise, you will only get high-interest rates.
- Repayment Timeline. Interest rates are higher if you take out a loan for an extended period because the lender has more risk. On the other hand, a personal loan with a short repayment period usually has lower rates.
- Loan Amount. The higher the amount you borrow, the more risk involved, adversely impacting the rate you get.
- Unsecured or Secured. Most personal loans are unsecured, meaning you don’t need to provide any collateral. Contrarily, if you take out a secured loan, you need to put up collateral such as your car or home.
Comparing Personal Loans
Some lenders allow borrowers to estimate or assess their interest rates without the soft inquiry prequalification process. This credit check will not affect your score in any way. On the other hand, submitting a complete loan application will result in a hard inquiry, affecting your credit score.
To better understand the rate you can receive, get estimates from different lenders and choose the best for you. Compare the following points when considering offers:
- Know how much the lender will charge in prepayment penalties, late fees, and origination fees.
- Monthly Payment. Learn how much the monthly payment will be and if it fits within your budget.
- You can lower your interest rate by taking out a personal loan from a credit union or bank if you allow automatic payments or where you precedently have other accounts.
- Loan Term. In general, shorter loan terms lead to lower rates.
- It depicts the total cost of your loan. APR is probably the most crucial piece of information to use when comparing rates.
Try to keep in touch with the lender to understand the terms of your loan better. If you have any questions or inquiries, you can easily discuss your concerns with your lender. Some lenders display their contact details on their official sites. Websites like creditninja.com typically have their email address or phone number at the website footer.
What to Do If You Only Receive High-Interest Rates
If you are not getting an affordable interest rate, you need to know why. Look for any red flags in your borrower profile, such as insufficient income and low credit score. If these are the problems, you either need to earn more income or improve your credit.
Alternatively, you can get a cosigner to attest for you. Say, for example, you have bad credit, get a cosigner that has a high credit score. Also, you can get lower rates if you put up collateral (secured loans).
However, be extra mindful because the lender can repossess your collateral if you pay late or miss a monthly payment. Moreover, if you are a competent borrower but aren’t getting a low rate, you might need to look around more to see if other lenders can offer the best rate.
You can get the lowest and most competitive rates with your financial situation and credit score. The lower the interest rate, the more money you can save on your loan. Make sure to compare rates from various lenders to find the best payment terms and interest rates for your needs.