Personal Loan Rate Basics

When you’re ready to apply for a loan, it’s important to know how your lender sets the personal loan rate they offer you. This is not an arbitrary number selected on a whim, but the sum of careful calculations they do concerning the nature of their business and how you fit into it. Knowing how they set the rate can help you to maximize your chances of getting the lowest interest rate possible.

Banking Industry Factors

Sometimes, the personal loan rate your financial institution offers to you has little to do with your creditworthiness. Industry factors play a large role in most service oriented businesses, but this is especially the case with financial companies. When the industry faces uncertain times, you’ll notice it in bank interest rates.

For example, a higher than normal percentage of defaulting mortgages causes a ripple effect through the financial industry because many banks are also in the home loan business. When one business unit takes a loss, the whole company must look for ways to cover these losses before shareholders hold them accountable for a decreasing stock value. Offering loans is the primary way banks make money, so increasing the personal loan rate is their best chance for additional profits until they can sell off their bad assets.

Personal Credit Factors

When market forces are not in play with the personal loan rate, your credit is the single largest factor determining what rate you receive. In general, the higher your credit score, the lower the interest rate on your personal loan. When you wish to obtain the low advertised rate of a lender, remember that good credit is not always enough. Within the fine print, the lender may stipulate the rate requires credit qualification. This can equate to scores hovering near perfect, not just above average.

Loan Amount Factors

If everything in your credit is top notch and the industry as a whole is without scandal, it doesn’t always make immediate sense why you did not get the interest rate you deserve. Rather than reflecting on you, your personal loan rate might be a reflection of the loan amount. It’s no secret that larger loans generate more profit for financial institutions than small dollar deals. You can ask your lender if increasing your loan amount will qualify you for a better interest rate, but know that the bank threshold may be beyond your reach, perhaps as high as $50,000 for a personal unsecured loan. In this case, the offered rate is the best deal for your loan amount.

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