Personal Loan Rates

Searching for the perfect loan option for you often means comparing the rates of competing lenders. You understand how the interest rate charged affects your payments and know it’s important to find the lowest personal loan rates available. What you may not know is exactly how lenders determine the interest rate they charge to lend you money.

Lenders use the following factors to set personal loan rates:

• Credit history
• Collateral
• Loan type
• Loan terms

Credit History

Reviewing your credit file gives lenders a good idea of how reliable you are to repay the loan. Generally, the closer you are to the perfect credit score of 850, the lower the rates you’ll enjoy as a result. Lenders sometimes tier personal loan rates based on credit score, so if you can maintain a score in the 700s, you should still receive a low rate.

Collateral

It’s no secret that lenders are more willing to take risks by giving loans to individuals with shaky credit when they have collateral. Collateral for a personal loan can be anything from a house to a car to stock certificates. Keep in mind that your collateral must have a tangible resale value in order to be accepted by lenders. Family heirlooms may have sentimental value to you, but banks won’t accept them unless they can be quickly sold for cash.

Loan Type

The type of loan you choose will often play a major role in the lender’s rate. Payday loans, for instance, carry some of the highest personal loan rates in the industry because of their extremely short terms. On the other hand, home equity loans maintain lower rates with possible tax advantages due to the nature of the collateral. If multiple types of loans will suit your purpose, make sure to compare rates between types, as well as lenders.

Loan Terms

The length of time you want to repay the money and your loan amount play a role in the interest rate with many lenders. Although all loans constitute income to financial institutions, they make the bulk of their profit from the larger loans amounts. If you lender uses the loan amount to determine your rate, ask how much more you must borrow to get a rate discount. Also, remember that the longer you take to repay the loan, the riskier it is for your lender that you’ll default on the loan. If you can afford higher payments, you may save on interest by shortening your loan’s term.

Every lender uses a different method to set personal loan rates, but if you remember these four key elements, you can find the lowest possible rate.

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