5 Little-known Factors That Affect Your Loan’s Rates

If you need a loan, you might already be familiar with terms such as interest rates and debt-to-income ratios.

All these and more are factors that could affect your loan rates and determine how much you can borrow as well as how much you will payback. That said, there is a lot more that goes into calculating your loan rates, some of which many people have never heard of.

Below, we will look at some of these little-known factors that can affect your personal loan rates.

 

#1 Loan Term

The loan term is the amount of time it will take to repay the amount borrowed.

Loans with a longer-term, five to seven years, usually have a higher rate than loans with a shorter term. Longer-term loans are also much more expensive when everything is considered because they accumulate interest for longer.

 

#2 Education

Some lenders use your level of education as an underwriting factor when deciding whether to give you a loan, what amount to give and the repayment terms.

The common reasoning is that young borrowers who have good jobs and professional degrees are in a better position to take on the burden of new debt, even if their credit score is low.

 

#3 Loan Principal

The principal is the amount of money you are borrowing. If you borrow a higher principle, you are likely to pay higher rates than if you borrowed a lower principle.

Banks and lenders see higher principles as being riskier than lower principles. Some lenders are very selective about their high-principle loans and will not give them to people they deem unqualified.

 

#4 Factor Rates

A factor rate is a fixed cost that banks and other lenders charge. These rates are common when borrowing small business loans or when you need a business line of credit.

A factor rate is a decimal range from 1.1 to 1.5 and the amount you pay back is calculated by multiplying the amount you are borrowing with the factor rate.

Factor rates are usually not compounded as they are a one-time charge. Once you understand what factor rates are, you will be in a better position to know if you need a loan with a factor rate or one with an interest rate.

Remember that the interest rate compounds over time and in some cases, you might pay more for the same amount if the loan has an interest rate than if it has a factor rate. Because of this, most lenders apply factor rates to short-term loans where an interest rate would not make financial sense.

 

#5 Benchmark Rates

As you might know, lenders and banks are interconnected. This means that a lender or a bank does not set its interest rates without consulting with other players in the industry. These adjustments are made as the underlying benchmark rates change.

Benchmark rates are affected by factors such as inflation and projected economic growth. Due to this, you can expect interest rates to rise when the inflation and economic growth rates are high, and to fall when the opposite happens.

 

Conclusion

When you need to borrow a loan, it is important to read the fine print as well as have a look at the whole industry. This will help you see if the amount you pay back compared to the amount you borrow will be worth it.