When you want to borrow a small or large amount of money, you have to pay attention to the rate of interest charged on the loan. You cannot apply for a loan that has a double-digit interest rate when other lenders are charging single-digit interest rates. By shopping around, you will be able to find the right lender and apply for the cheapest loan. Since there are many lenders out there, it will take some time to identify the right lender, so you should not be in a rush to commit yourself.
There are many factors affecting personal loan interest rates. Knowing these factors will enable you to make decisions that are well-informed. Read on to discover the three key factors that determine the rate of interest charged on personal loans:
i) Credit Rating
A credit score or rating is a measure of the creditworthiness of a consumer based on their loan repayment history. Individuals who have defaulted on several loans, made numerous late payments, filed for bankruptcy or had their home repossessed usually have a poor credit rating or a low score. Lenders are usually wary of these consumers as they may not be able to service the personal loans they are applying for. If your credit rating is poor, therefore, you can expect to pay a higher rate of interest due to your perceived risk and vice versa.
ii) Choice of Lender
There are many lenders in the industry and they all offer different types of loans. If you choose the wrong lender, you may end up procuring a high-interest loan. Therefore, it is imperative you spend some time checking the interest rates charged by different lenders and compare them before making your decision. Please note that some banks and private lenders have access to cheap capital, so they can afford to offer affordable loans.
iii) Market Conditions
The rate of interest charged by lenders is usually dependent on the prevailing market conditions. If the government decides that there is excess liquidity in the market, they can hike rates to mop up the excess cash and discourage lending. As a result, the cost of personal loan interest rates will increase. This means you will have to spend more on interest payments.
It is important you work with a loan broker if you are not able to find the cheapest loan in the market on your own. There are many of them, but you should only consider independent loan brokers.