Personal Loan Interest Rates and the Frequently Asked Questions
Personal loan interest rates have always been a matter of consideration whenever people look for financing institutions. People always believe that the lower the interest rate is, the better the deal becomes. But actually, low rate is just one of the factors that make a personal loan affordable. There are plenty of things that consumers need not forget to consider when applying for personal loans.
What is an interest rate?
All kinds of loan have interest rate. An interest rate is a rate that is charged on top of the borrowed money or item. For example, you borrowed money from the bank to spend for home improvements. In exchange of lending you the money, the bank collects an interest based on a predetermined rate which is usually charged annually. There are many factors that affect interest rates. They include the riskiness on the part of the lender, the duration of the loan, and the amount to be borrowed. Most personal loans offered in the marketplace today are not secured. That is why it is said that personal loan interest rates are relatively higher than the other types of loan.
The interest rates that people refer to when they talk about loans are the nominal interest rates. A nominal rate is one that is always affected with the inflation rate.
Can interest rates go down? If yes, to what extent?
Lenders profit because of interest rates. However, there are times that interest rates can go down to zero and even fall down to negative. This means that the lender needs to pay the borrowers because of lending money to them. But this situation is very rare and is greatly affected by some economic indicators.
What are the factors that affect personal loan interest rates?
As stated earlier, the interest rates of loans are generally affected by the amount of principal loan, the length of time that the loan will be paid, and the level of risks that the lenders confront whenever they lend the borrowers. But aside from these, there are still some things that every consumer should look at when applying for personal loans.
1. Credit Rating (FICO)
The credit rating determines the level of risk that lenders are going to take when approving loans. Good credit scores would mean good capacity to pay. This is what most lenders are looking for in their clients. A good credit score is one which is equal to or higher than 700 points.
When it comes to personal loan, there is no standard credit rating. Many people think that once they got denied of loan because of poor credit rating, they will also be denied by other lenders. This is what most of them call loan blacklist. Well, this is not true. Every lender has their own wish list or set of standards. When a client was rejected by one lending company, it doesn’t follow that others would do the same.
2. Type of Personal loan
In general, personal loans may be classified into two: secured and unsecured loans. A secured personal loan is backed by collateral. In times of default, the lender may take ownership of the mortgaged item. Because there’s a form of security, the rates are low. In unsecured loans, lenders do not have any hold of the borrower’s property and therefore, the risk is high. That is why in this kind of loan, the interest rates are high.
Personal loans may also be classified as home equity personal loans, home equity line of credit, fast cash advance loan, military payday, short-term loans, no credit personal loans, and Christian lending. On home equity loans, the house of the consumer serves as the mortgage. The advantage is low interest rates but in case of default, the borrower home may be foreclosed. For people who have unexpected expenses or emergencies, the best type of personal loan available for them are the fast cash loans. Application is easy and the borrower receives the loan in a very short while. But then, the payment term is also short (not more than two weeks) and the interest rates are high.
3. Competition between lenders
Lenders lend money basically because they want to earn. The lending industry is one of the most complicated and competitive. Every year, new lenders join the marketplace offering better deals. Because of this competition, lenders are forced to lower down personal loan interest rates. Well, if they will not do this, they will surely run out of business. The effects of competition benefited consumers a lot. Today, even bad credit holders do have great chances of getting accepted by financing companies.
4. Bankruptcy
Bankruptcy is a term used for a person or entity that becomes insolvent. When a person is declared bankrupt, he/she loses the right to apply for loans. This condition also affects that person’s credit rating.
When the borrowers can no longer pay for their bills and the loan is secured, they can seek the declaration of bankruptcy so their property will not be foreclosed. This will put the lender in the losing end. That is why they don’t accept borrowers who had history of insolvency. And if ever they approve, the personal loan interest rates applied are expected to be very high.
5. Inflation Rate
The last but not the list of the major considerations in setting up interest rates is the inflation. What is inflation? This is an economic condition characterized by the increase on the prices of commodities. When there is inflation, consumers must expect high interest rates.
While it is true that consumers do not have control of the interest rates set by the lenders, they can always find ways to obtain greater deals and even pull the interests down. How? First, every borrower should compare the services offered by different financing companies. One lender may have a higher interest rate than the other but it may turn out that such company provides more affordable terms. Consumers should always look on the terms and conditions and even the smallest details of the loan offer before signing the contract.
When is the best time to loan?
Among all kinds of loans, personal financing is the most flexible and it is generally meant for all financial purposes. Experts advise consumers to loan only when they need it. This is the rule of thumb of personal loans. For those who have credit damage, it would be best if they can wait for some time to fix their records for a better chance of obtaining affordable personal loan interest rates. Moreover, borrowers should be in a better position to their bills. This can be attained when they have stable monthly income.