UNDERSTANDING INTEREST RATES
What kind of interest rate your receive for your
personal loans is going to be
determined by three major variables. Having knowledge about the factors will not
only save you money and time, you will avoid frustration of applying for loans
that you do not qualify for.
The Federal Reserve Discount Interest Rate
Lending institutions and banks borrow money from the Federal Reserve Bank.
The rate that the Federal Reserve Bank charges financial institutions for
borrowing funds on a short-term basis is called the 'discount rate'. The
discount rate is established/set by the board of directors of the Reserve.
Discount rates have an immediate impact on the 'Prime Interest Rate'. Prime
interest rate is the rate banks charge consumers on short-term personal loans.
The prime changes daily and can be obtained in real time by visiting
Of all the major influences of interest rates, this is the factor that you will
have the smallest amount of control over.
FICO Scores and Credit Reports
The CRAs (Consumer Reporting Agencies) collect and sell information on where
you live and work, all of your bill paying activity, and whether you have filed
bankruptcy or been arrested or sued. The major CRAs are Transunion, Experian and
Equifax. Ever lender out there is going to pull your credit report when
determining whether or not to lend you money.
Your FICO score is
a scoring method that compresses your credit history into a single number. This
score is used to determine the probability that you pay your bills. Get more
info on how FICO scores are
You can ensure a high FICO score and positive credit report by paying your bills
timely ever month and by never over-extending yourself. In addition it is
important that you know what is on your credit report before you apply so that
fix your credit by removing any negative and/or outdated info.
Getting a copy
of your credit report regularly is important.
Competition for Your Business
Every lender is in the business of lending money in order to generate a
profit. The lending industry is extremely competitive. As a result, they will
determine what profit margins they aim for based on the competitive factors.
They run the risk of going out of business if they do not charge enough based on
the prime rate and your credit. If they charge you too much, then they run the
probability of losing you as a client. Therefore, if you want to get the best
deal, it is important that practice
effective loan shopping.
When shopping for your loan is very important that you understand that every
time you apply, an inquiry is going to show on your credit report. The more
inquiries in a certain period of time, the more adversely effected your FICO
score is going to be. That being said, applying for too many loans/having
too many inquiries in a small time frame is going to be counterproductive. A
rule of thumb is to not apply for more than four loans within a three month time
frame. When applying for personal loans online, your credit report will usually
not be run until after their initial quote is accepted by you.
Prime rate, your FICO score (credit history) and competition for your
business are the three major variables that are going to effect what sort of
interest rate and terms you receive for your unsecured loan. The two most
important things you can do to ensure that you get the best loan is to pay your
bills on time every month and shop around with different lenders.
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