When applying for a loan, you want to make sure you get the lowest interest rate possible. A loan interest rate is the amount a lender charges for borrowing money. It’s a percentage of the total loan amount. The lower your interest rate, the less you’ll end up paying during the life of the loan.
Lenders consider many factors when it comes to determining your interest rate. Understanding these factors is the key to qualifying for the best interest rate possible. Here are some factors that affect loan interest rates.
One of the most important factors lenders use when determining a loan interest rate is your credit score. Your credit score is a number that represents to lenders your ability to pay back a loan. It’s based off your credit history, payment history and current financial situation. Generally, the following are categories for credit scores. The higher your credit score, the better your interest rate will be.
- Excellent: 850 to 720
- Good: 719 to 690
- Average: 689 to 630
- Low: 629 to 300
You can obtain your credit report from three major credit bureaus—Experian, TransUnion and Equifax. Each one collects and shares information about your credit usage with potential lenders and financial institutions.
Normally, your credit report is available every 12 months from all three credit bureaus. However, since the pandemic, online access to your credit report is available on a weekly basis for free. You can visit AnnualCreditReport.com to view your credit report. You can also check your FICO® Credit Score through a feature on our Mobile Banking App.
While reviewing your credit report, make sure to also check for any errors. If you notice an error, like an incorrect balance or a loan you paid off that’s still showing unpaid, you can dispute it with the credit agencies. Yor credit score will help determine the amount of your monthly loan payment as well as your interest rate.
Your payment history accounts for 35 percent of your credit score. That’s why it’s so important to pay your bills on time, all the time. Just missing or being late on one payment or two can have a negative impact on your credit score. Lenders take a look at your payment history when determining your interest rate, so the better your payment history, the better your interest rate will be.
Lender will also take the current debt you have into consideration. They will look at your debt-to-income ratio. This is the percentage of your monthly income that is being applied to your existing monthly debt. It can be found on your credit report. Your debt-to-income ratio tells lenders how easily you’ll be able to make a new loan payment. Typically, a debt-to-income ratio of less than 36% will help put you in the category to get the best possible interest rate.
Income and employment history
Your amount of monthly income is another determining factor. Lenders want to ensure you have enough income to adequately cover your new loan. When applying for a loan, you’ll need to provide proof of income which could include pay stubs or current tax returns.
Lenders also look at how long you’ve been able to keep the same job. You appear more financially stable and capable of making your loan payment the longer you’ve kept a job.
In some cases, you have the option to make a down payment on a loan. A down payment is the amount of money you put upfront when starting a new loan. It’s usually a percentage of the overall loan amount, and depending on the type of loan, can vary anywhere from three to twenty percent.
The bigger the down payment, the less principal you’ll have to pay back on the loan which could also help you qualify for a lower interest rate.
Before applying for any type of loan, be sure to get your credit score and all these other factors in good shape to ensure you’ll end up with the best interest rate possible. Whatever your financial goals may be, check with us first for loan options to help move you ahead.