What Interest Rate Will I receive On My Loan?
- 21st September 2018
- Posted by: Loanable
- Category: Resources
When taking out a loan there are a few things a lender will review in determining if they will grant a loan or not, and also a few things we as borrowers will review in determining which loan best suits us.
Lenders will look at affordability, and also our credit history and credit scores.
In reviewing an income and expenditure form, a lender can determine if we can afford to repay the loan. In reviewing our credit reports and credit scores, a lender can see how we have paid our accounts in the past, and the present, which becomes a good indicator of how we will repay any future accounts or loans.
There can be other factors involved in getting a loan, depending on the type of loan.
If one is seeking out a car loan or perhaps a mortgage loan to buy a property, the amount of deposit a borrower has an influence the loan being approved.
The larger the deposit, the more likely the loan will be approved, even if the borrower has a weak credit score. This is because the larger the amount of the deposit, reduces the amount of money needed to be borrowed, which reduces the lender’s risk in granting the loan.
Those with higher deposits are less likely to default on the loan.
And as we will see later, these factors, credit score, and the amount of deposit you have, can influence the interest rate you receive for a loan. As can the type of loan you are seeking out.
Things to Look For When Taking Out a Loan
When you need a loan, be it to buy a car, buy a property, even if it is a personal loan or a credit card, there are a few things as a borrower you need to know, and be aware of.
You need to know:
* The purpose of your loan
* The amount you need to borrow
* The term or how long you need to borrow the money for
* The interest rate or APR offered
* The monthly payments and how much in total you will be paying back over time.
While some of these details you have control over, such as what you want to use the loan for and why you need it, some details you do not have control over. And one of those details as we will see, is the interest rate, or APR.
APR stands for Annual Percentage Rate, and for some, this is confusing and is different than the interest rate stated for some loans.
In most instances an APR will appear to be higher than the offered interest rate. This is due to the fact that the APR takes into account not just the interest rate for the loan, but also any fees or charges that can be a part of the loan, and the APR expresses these as a figure or percentage showing the “actual cost of funds” over the term of the loan in an annual manner.
APR’s allow borrowers to make a fairer comparison of rates being offered, as the APR will take into account any additional fees or charges, over the course of the year.
APR’s are a “bottom line” figure to use in reviewing loans being offered to you.
However, as a borrower you need to understand, the lowest APR may not always be the best deal for you, or for what you are requiring a loan for.
An example are payday loans.
Payday loans are short-term loans, for 30 days or less, that are one of many bad credit loans, for those borrowers with bad credit.
The interest rates for payday loans are high, but when expressed as an APR or annualised, they seem outrageously high, like 1,500% or 2,000% or higher!
This is due to the fact payday loans are as mentioned, short-term loans for a month or less, until the borrower’s next payday. By expressing these short-term loans as an annual or 12 month payback period, it exaggerates the interest rate or APR to the extreme percentage it is.
That is no to say payday loans do not carry high interest rates, but as an APR they appear to be extremely high.
Why Are There Changes in Rates That Are Offered?
Just because you see an interest rate being offered by a lender, either online, or through some ad, does not always mean you will get that interest rate.
There are things called Representative Rates:
Representative interest rates are interest rates that 51% of those that applied for that specific loan received the rate being shown. Which means that 49% of those that applied received a different interest rate, which could be lower, but probably higher, and some may have been rejected for a loan altogether.
The rate being shown is as it states, just a representative rate.
There are other factors at play that can determine what interest rate you may receive:
Type of loan: The type of loan you are seeking can have a big impact on the interest rate you receive.
Secured loans can have lower interest rates than unsecured loans, due to the fact there is some collateral, or something securing the loan, be it a car, or a property.
As mentioned, loans such as payday loans, can have high interest rates associated with them, as can other forms of bad credit loans.
Credit score: Usually the best/lowest interest rates offered to borrowers, are those with the highest, or better credit scores.
Lenders may tier their interest rates, so that those borrowers with a certain credit score receive one rate, perhaps lower, than someone whose credit score is lower, and they may receive a higher interest rate.
This is where checking and knowing your credit score can be helpful. And there are ways to increase your credit score as well, which may get you a better interest rate.
Amount of loan and term: Loan amounts can determine the interest rate you receive as well, in addition to the term, or length of the loan.
Shorter loan terms can receive lower interest rates as the lender will be repaid and get their money back at a quicker rate, which reduces the risk on the loan.
It can also save you money, not just by receiving a lower interest rate, but also by not paying interest on a loan any longer than you have to.
Ways to Get The Best Interest Rates
In some instances it may be possible to negotiate the interest rate on a loan, however, usually, the rate offered is offered for a reason, and there is not room to discuss any changes.
In order to seek out the best interest rates, and in discussing the interest rate with a lender, you can look at the above factors involved in determining the interest rate you may receive.
Check and know your credit score. If possible increase your score, by having any errors or omissions corrected, get on the electoral roll, and also pay your accounts on time and do not apply around for a lot of credit.
Show affordability for the loan, that you can easily repay the payments, and if possible, shorten the term of the loan.
If you can repay a loan you were thinking of taking out for 24 months in 18 months, then only look at the shorter term. This may help in getting a lower interest rate.
If you are seeking out a secured loan, such as for a car or property, have a larger deposit than what may be the minimum required by the lender.
The larger your deposit, the less you need to borrow, and possibly for a shorter period of time, all of which can help you receive a lower interest rate.
So in answering the question, what interest rate will I receive on a loan? That is a complex question, and just because you see an advertised interest rate, or a representative interest rate, it does not always mean you will qualify for that rate.