4 Factors that Contribute to Fluctuating Interest Rates on Personal Loans

There are large-scale and individual factors that work together to create fluctuating interest rates. When you apply for a personal loan, your loan rates will be subject to all of these influences. Your loan will depend both on the national factors of the loan markets as well as the personal factors of your financial status and choices. Understanding how these work together will help you choose the right time to seek a loan and which type of personal loan to seek.

#1 Your Credit Score

Your credit score will always play a big part in the interest rate you receive on personal loans. A good credit score starts at around 700, but a fluctuation of 50 points either way is common. Your credit score is a measure of how well you have performed on previous loans and credit lines. Each time you made a payment on time, you received a positive mark. Each time you missed a payment, modified a loan, or extended your limits too far, your score took a hit. The score you see today is based on a complicated algorithm that takes all these factors into account to tell future lenders how trustworthy you are.

#2 Loan Options

The type of personal loan you are sourcing will also affect your rate. A secured loan uses collateral to make the loan cheaper for the borrower. An unsecured loan does not require collateral, making the loan less risky but also more expensive for the borrower. Other factors in your loan include your loan limits and down payment. The larger your down payment, the less the lender will typically charge you in interest rate. Ultimately, you can negotiate your loan on all of these terms until you reach an interest rate you are comfortable with. 

#3 National Prime Rate

While your credit score and loan options are personal factors, there are also national factors at play affecting the cost of your loan. The national prime rate is set by the Federal Reserve to control the supply of money in the economy. When the rate is low, your loan will typically be cheaper, and vice versa. Ultimately, though, low rates can also signify a recession or slow economy, which may make your rates more expensive. People with bad credit will be more affected by swings in the national prime interest rate. In general, people with bad credit are better off taking loans in a strong economy.

#4 Status of the Credit Market

The credit market on the whole will affect every single lender and every single loan. In a recession, lenders do not have as much cash on hand to loan to you and other borrowers. They will, as a result, only source the most favorable loans they can find. Again, this makes it easier for a person with good credit to get a loan at a low interest rate. If you have bad credit, the interest rates on your loans will be even higher in a bad economy. If you have good credit, a recession may be an opportunity for you to get a cheaper loan than you would receive in a strong economy


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