Are you wondering how lenders choose an interest rate for your personal loan? The factors are rather straightforward and easy to understand. In this PDS blog, we explore how you can use your lender’s preferences to improve your chances of receiving the best offer.
Personal Loan Interest Rates, Explained
What are personal loan interest rates? Your personal loan interest rate is an expression of how much your chosen lender charges you to borrow its money. Your current personal loan interest rates are specific percentages of any borrowed amounts.
Some lenders will use a fixed rate that won’t change throughout the life of the loan. Others will offer variable rates that can grow as the economy changes and the Federal Reserve announces a rate hike.
What Determines Personal Loan Interest Rates?
Each lender has its own standards to determine what is the interest rate on a personal loan. However, there are common factors they all consider. A few include your credit score, payment history, the age of your credit and type of credit, and how much money you have available each month to pay bills.
Credit Score
Your credit score usually has the greatest influence on your interest rate because it indicates to the lender how good a risk you are. The higher your credit score, the more trustworthy lenders consider you.
They present their lowest rates to applicants with the highest credit scores, which are often at least 720. If your credit falls around 600, the lender may offer you only a high interest rate.
Payment History
Lenders are interested in how well you’ve handled credit over the last several years. For example, they want to know if you have a track record of paying your bills on time.
If it’s a challenge for you to meet payment deadlines, they will consider you a high risk of also being late with their payments. In turn, if they offer you a loan, it won’t be with the most favorable interest rate.
Age and Type of Credit
How long have you had a credit record? The longer your credit history, the better your chances of getting an excellent interest rate.
You can also help your situation by having a history of diverse credit. In other words, all your credit isn’t the same, such as only credit card debt, which is a type of revolving credit. Lenders would prefer to see that you’ve also successfully managed, such things as a personal loan or installment loans like an auto loan or mortgage.
Debt-to-Income Ratio (DTI)
Your DTI is a comparison expressed in percentage of how much you owe each month versus how much you earn. Lenders want to make sure that you have enough funds available to meet your latest obligation if they offer you a loan.
Each lender can set its preferred standard for what constitutes a good or bad DTI. It’s usually safer to have no more than 36% of your income allocated for debt if you want a low interest rate from most lenders.
Lenders want a low DTI even if you pay your bills on time, so, if possible, try to lower your debts or increase your income before applying for the loan. Allow enough time for your credit history to reflect any DTI improvement before submitting your application.
Lenders consider several factors, such as your credit history and DTI, before deciding which interest rate to offer you. Now that you know what those factors are, you’re in a better position to improve your metrics and make your application more appealing. Doing so can give you an interest rate low enough to fit your budget but attached to a loan that can help you reach your financial goals.
Interested in learning more about personal rates, interest rates, and debt relief options? Contact PDS today.
