How the Interest Rate Can Affect Your Loan

The interest rate serves as the cost of borrowing money. The interest rates are expressed in terms of percentage of the total amount borrowed. Generally, if your interest rate is high, you could have a harder time paying off your loan or managing your finances.

When one borrows money, the lender then charges a fee for letting you borrow the money over a certain period of time. You’re actually borrowing the principal, and the interest will be used by the financial firm to cover the administrative costs and generate revenue. As a borrower, your main goal is to find the deal with the lowest interest rate. You can visit sites like to compare your options quickly and easily.

Now let’s take a look at some of the factors that could affect your loan’s interest rate:

Your profile

If based on your credit history you are a high-risk borrower, they may charge a higher interest rate for your application. This compensates the level of risk they’re taking in giving you a chance. If you have previous loans that you have not paid, you are considered a higher risk borrower. Thus, your credit score has to be good in order to possibly receive a lower interest rate.

Even the timeliness of your previous loan payments will be investigated. If you are into loans, it is very important to take care of your credit score since it can make or break your chances of being qualified for various types of loan. You also have to minimize late payments since it can also affect your interest rate. Even if your general credit score is good, but your repayment history isn’t very impressive, you may only get a moderate interest rate. If you have defaults, you could either get higher interest rates or get rejected. Usually, lenders see if a loan applicant doesn’t have defaults over the past year at least.

Term of the Loan

The loan’s term is one of the important factors in determining the final interest rate. Short-term loans usually have lower interest rates. This is because the market conditions of short-term loans are generally predictable. Lenders do consider the inflation rate fluctuations and the country’s economy as a whole. Long-term loans are harder to predict, so to give leeway, they place higher interests when it comes to long-term loans.

Collateral or security

If you use your real estate property as the collateral, that could help you get lower interest rates as compared to just using your credit cards. Since credit cards are usually prone to frauds and other risks, lenders consider this type of collateral as high-risk as well, thus charging you a bigger interest rate if you only have your credit card as your collateral. Since homes are tangible assets, they’re more secure in the eyes of the lenders.


The last factor lenders look at is inflation. There are economic changes that cause prices to rise, and this is somewhat normal. Thus, lenders do factor in the anticipated inflation rate when finalizing the interest rate you’ll get.

Overall, as long as you have a good credit record as a borrower, you won’t have much problem in acquiring a loan. If your credit score is bad, there still are ways to turn things around. Just be persistent and you’ll eventually find a way out.


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