Life is full of surprises. One moment you are happy, the next you are in emotional turmoil because of a medical emergency. The thing is, you never know what is coming your way, which is why you may sometimes need a personal loan to give you financial flexibility. If you are new at all this, you may want to be familiar with interest rates and how they may vary for different lenders. It is wise to know the various factors that influence your personal loan rates before making an informed decision. They are outlined below in this article.
1. Your Credit Score
Every lender will want to know your credit score before entrusting you with funds. While this may not be the only basis of money-lending decisions, it happens to be the main one. To arrive at your credit score, calculations are done using data from your credit card reports. With the help of this data, your lender assesses your creditworthiness or the likelihood of you repaying the loan on time.
Credit score calculations also consider factors such as credit utilization, repayment history, and length of credit history. Credit scores begin from 300 to 850. The higher your scores, the more attractive lenders will find you.
2. Your Income Level
The higher your income, the lower the interest rates. Lenders consider high-income individuals reliable, as they are often less likely to default on their loan repayments. Lower-income earners, on the other hand, are considered a threat, thus the higher interest rates.
3. Your Employment Status
Typically, personal loans are unsecured. Because of this, lenders will always look for other factors that help them place their trust in borrowers. One such factor is your employment status or reputation. Borrowers employed in renowned organizations are considered more financially stable, thus are likely to make timely repayments. It isn't uncommon for lenders to relax their lending policies for borrowers in certain organizations.
4. Your Debt-to-Income Ratio
What is your debt to income ratio? Imagine working a well-paying job, but most of your salary goes to debt payments. If this is the case, your previous debts will have an impact on your personal loan rate. To calculate your debt-to-income ratio, divide your debt payments by your total income. The higher the ratio, the more your responsibilities and, consequently, the higher your interest rate.
5. Your Relationship With a Lender
Building a relationship of trust with your lender goes a long way to grow the bond between you. Banks and other lending organizations tend to be lenient in interest rates when it comes to trusted customers. The same cannot be said for new customers. You should, however, remember that trust cannot be built overnight.
Generally, several factors affect the interest rates that will be charged on your loan. Knowing about these factors helps you do a check on yourself and determine whether or not you are ready for a loan.