Key Factors That Determine The Interest Rate
Interest rate is a very interesting topic, especially for loan borrowers. For investors the most important thing to look out for in an investment decision is the interest rate, because this figure will determine the amount that the borrower would pay. The borrower would always like to take a loan option in which they have to pay the lowest amount as interest along with the principal. Thus, it can be easily understood why most borrowers like to gather as much information about the latest prevalent interest rate in the market.
There are many influences that determine the interest rate. The three main factors that largely affect the interest rate are: the federal reserve discount interest rate, FISCO score and credit report, and lender business factors. Comprehending the meaning of these factors will allow the borrower to choose the right type of loan, and avoid the high fees and frustration.
Federal Reserve discount interest rate: This rate refers to when the banks and other companies borrow money from the Federal Reserve. The Federal Reserve offers these lending companies loans on a discount rate because they borrow it on a short-term basis. The Reserve Banks’ board of directors set this discount rate. Incidentally this rate influences the prime rate, i.e. this is the rate that clients who have high credit ratings are charged by the lending companies. For example, to a high credit rated customer the interest rate charged would be the prime rate plus one percent. Understandably this factor is completely out of the borrower’s hands, as he has no control over the decisions of the Federal Reserve.
FISCO score and Credit Report: This is actually an evaluation report. There are many such reporting agencies or companies, commonly known as consumer reporting agencies, that gather and sell personal information about an individual’s spending and living habits, along with creditworthiness and criminal history (if any). When a loan is applied for, the lending company contacts the credit bureau for your FISCO score. The FISCO score is a numerical figure that is calculated keeping the above factors in mind. This number ascertains your risk as a borrower. The higher the FISCO number is the better the interest rate that you will be offered.
One thing to remember while applying for a loan is that your Fisco score can also be affected by the number of times your credit report is accessed in a particular period of time. Therefore avoid the temptation of applying to every loan company in town. Select your favorite top four companies and apply only to them. As a thumb rule, most of the lending companies or even online lenders will not access your credit report unless they have given you a quote. Also keep in mind that you have to share your social security number while applying for the loan; hence prudence while applying for a loan is absolutely necessary.
Lender business factor: There are other factors as well that affect the interest rate, like the competition among the lending companies. It is obvious that all the lending institutions want to make a profit, and that they all exist in an extremely competitive market. Therefore, their lending rates are determined by competitive factors. For example, charging too little will lead to loss, while charging too much will lead to loss of customers. Therefore, when shopping for a loan evaluate all the market options so that you get the best deal.
Once you understand these three factors that affect the percentage of loan interest, you must take care to have a good credit history and evaluate all the lending options before applying for one, so that you get the best loan interest rate.