Breaking Down the Variables that Affect a Borrower’s Rate on Personal Loans
At some point in your life, you probably needed to come up with money for a home or vehicle purchase. Or perhaps you needed an influx of cash to perform some long overdue home renovations.
However, most individuals don’t have thousands of dollars sitting in reserve to fund these types of purchases or projects. According to recent statistics shared by Market Watch, the median savings balance for people under 35 is approximately $3,200. For those who are in their mid-50s or nearing retirement age, the median savings balance is around $6,400.
This means that most Americans need to work with a personal loan bank for things like home mortgage loans and automobile loans. This type of loan is win-win for both the lender and the borrower; the borrower gets what they want immediately while the lender gets paid back with interest over time. The interest rate is what makes the arrangement advantageous for the lender; however, how the rate is set is a mystery to most borrowers.
What Determines an Interest Rate on Personal Loans?
There are several factors that determine the interest rate a borrower is offered on a personal loan. The first main component is the borrower themselves. In a personal loan scenario, a lender must look at a borrower in terms of risk. Risk is usually determined by the following attributes:
- Credit score
- Debt-to-income ratio
- Current employment
- Amount of down payment
- Requested loan amount
The lower the risk, the lower the interest rate that a lender is willing to offer. However, interest rates aren’t totally determined by the lender or banking institution. There are a few external factors that influence interest rates for personal loans and other aspects of finance, such as savings accounts and money market accounts.
The following are some of the main agencies and factors that impact interest rates:
- The Federal Reserve (aka the Fed) directly influences prime rate and the Secured Overnight Financing Rate (SOFR), which are the two main aspects of short-term interest rates. It’s worth noting that The Fed has been raising interest rates to help with the country’s inflation issue and help stabilize the housing market, which is having a direct impact on home mortgage loans.
- The U.S. Treasury also has a direct impact on interest rates. Specifically, interest rates on longer term loans, such as home mortgage loans. However, they can also impact the rates on an automobile loan or other personal loan product a financial institution may offer. Rates are determined by the demand and yields on 10- or 30-year treasury notes.
- Supply and demand also have a heavy amount of influence on rates. Banks and lending institutions rely on personal loans to generate revenue. If the demand for personal loans is low, a lender may reduce their interest rates to make them more enticing to consumers. Conversely, if there is a huge demand for personal loans, the lender may increase their interest rates to generate more revenue. It’s worth noting that many banks have a limit to what they can legally loan to a single borrower and an overall limit for how much they can lend overall.
What to Do to Ensure You Get a Low Interest Rate on a Personal Loan
There are two things that you, as a borrower, can control when it comes to taking out a personal loan. The first is timing. As we saw last year, the timing was excellent to secure a home mortgage loan. In fact, at one point the rates were around three percent. However, it’s difficult to predict the perfect time to take out a loan, which is why you should focus on the second thing that’s within control – your credit profile.
Your credit report, income, debt-to-income ratio, and other factors heavily influence what rate a lender will offer on a personal loan. If it’s been a while since you’ve reviewed your credit report, you can make that request by directly contacting one of the three major credit bureaus or by signing up with a reputable credit reporting service. It’s also worth noting that personal loan banks will pull your credit report when you apply for a loan.
No matter which method you use to access your credit report, there will be a section that details what you can do to make your score increase. Some examples include paying down credit card balances, taking care of items that are in collections, and making consistent on-time payments.
Putting in the work and effort to increase a FICO score from the 500s to the 800s can potentially impact a personal loan interest rate by several percentage points. For reference, Equifax uses the following FICO score tiers:
- Fair credit: 580 – 669
- Good credit: 670 – 739
- Very good credit: 740 – 799
- Excellent credit: 800+
Need to Apply for a Personal Loan? Contact Verimore Bank Today!
We love being the bank that gets our customers into their first home or behind the wheel of a brand-new vehicle. Home mortgage loans and automobile loans are two of our most popular loan types. However, we also offer personal loans that will allow you to fund your next home improvement project, pay for an emergency expense, or consolidate all your high interest card balances at a lower rate.
Whatever the case may be, Verimore Bank is happy to help. You can get the personal loan application process started by reaching out to us directly.
Visit our locations page for branch addresses, contact info, and hours of operation.
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