A Guide to Interest Rates on Personal Loans

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Your Credit Rating Will Be Examined

Regardless of what type of loan you apply for at a bank or other lending institution, the first thing a prospective lender will do is request your credit report to assess your credit rating. Your credit rating will tell them how many debts you currently have as well as how you've paid your debts in the past. Lenders usually are unwilling to approve a personal loan to an individual with poor credit. Occasionally, lenders will approve a personal consolidation loan to help a borrower improve their credit; however, personal loans are usually reserved for those with good credit.

There are different things that will determine what the interest rate on your personal loan will be. Lenders may vary in their methods of determining eligibility as well as what interest rates they'll charge on their personal loans so check around at many different lenders and fully read their terms and conditions before you sign on the dotted line. There are many online lending companies that will give personal loans with just a simple application. Many of them are available with only a short waiting period.

Personal loans may have a variety of different interest rates depending on the lender where you apply as well as other factors. Some of these factors may include:

  • Your income
  • Your credit and repayment history
  • Your employment
  • The amount you wish to borrow (larger loans usually carry a lower rate)
  • The type of personal loan, fixed or variable, secured or unsecured.

Your Income is the Key

The amount of income you earn will have a bearing on your interest rate. Your lender will want to be assured that you have enough income to cover your repayments. In a loan where you are offering collateral as security on the loan, the lender is still going to be interested in your income but not to the same extent because they have your collateral to fall back on in case you default on the loan. On an unsecured personal loan, however, your income is your sole means of paying the loan back so they're going to want to make sure you have a low debt/income ratio. Your debt income ratio is the amount of debt you have in total dollars as compared to the total income you have coming in each month.

Your credit report is also going to tell a lot about you in regards to how much debt you have now, how much you've had in the past and how you have paid off these debts. If they see a history of late payments, it is unlikely that you will be offered a loan at all via one of the major financial institutions. However some non-bank lenders may offer the finance you need although at substantially higher rates (such as pay day lenders).

If a borrower defaults on a loan and the lender has to take legal action, this is time consuming and costly. The more interest the lender has collected on the loan, the less they've lost in case of a default. So, you can see how your credit history is going to affect the interest rate you'll be charged on your personal loan. An individual with an excellent credit history is going to be offered a better interest rate because the lender knows they're a good risk and want their business in the future as well.

Having a good income now is important to the lender but it's more important that they know you will, in all probability, continue to have a good income. The history of your employment as well as your employer is going to play a part in the interest you'll pay on your personal loan as well. If you have steady income with a good company that's going to be around for awhile, the lender is also going to look more favorably on you as a personal loan customer and this will be reflected on your interest rate.

Final Points

It is important to remember that interest rates on personal loans are generally higher than they are on secured loans because they have no other security, but by having a positive credit history, income and employment, the lender is going to be more willing to negotiate with you on your interest rate. In addition if you are requesting a small loan, the interest may be slightly higher that you'd pay on a larger personal loan. Many lenders have different interest tiers. For instance, an individual with good credit can get a personal loan for $10,000 while another individual with the same credit may get a personal loan for $50,000. The individual borrowing the $50,000 will probably get a lower interest rate because the loan term will be longer so the lender will get more interest during the life of the loan.

These are all factors to consider when shopping for a personal loan. Shopping is the key, too. Don't get your personal loan from the first lender you stop at. Shop around for the best deal on your personal loan. The better the loan terms, the less you'll pay and the easier it will be to make the payments.

What to do next

Finance Comparison lists a number of highly competitive personal loans that you can apply for online. Simply compare rates, terms and apply online.

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