Here are the four of the biggest factors that can affect your interest rate.
* Collateral. The risk to the bank is obviously much lower if they know they’ve got a “Plan B” for recovering the money they’ve lent you. For that reason, banks are willing to offer lower interest rates if the borrower is willing to back up their pledge to repay the money with, say, a lien on their house on their car. This is one of the reasons that it’s easy to get a good interest rate when refinancing a home mortgage. The banks know that the money they’re loaning you is backed up by a very valuable asset: the home itself.
* Credit history. Let’s put it this way: Bill Gates probably doesn’t have any trouble getting a low-interest loan. Why is that? The bank performs a thorough credit check on every borrower, and they’ll know who’s made all their payments promptly. And yes, this means that they’ll also get a nice look at the current debt level for every borrower. While this doesn’t mean that they’ll reject your loan application, it does mean they’ll have questions about your ability to also handle this second chunk of debt – and they’ll probably insist on loaning the money to you at a much higher interest rate.
* The Federal Government’s own interest rate. In the big picture, the banks aren’t just lending you their money. They’re also borrowing money from the federal government, and then loaning that money out at a higher interest rate. Lately there’s been a lot of news stories about the federal government lowering interest rates to banks. In theory this means that the banks can then lend that money to local customers at a similarly low rate, while still making a profit. It may not that you’ll get the low-interest loan, but it will definitely have an effect on your loan’s interest rate.
* Your demographic profile. All lenders have already crunched a lot of data about the pay-back history of several different types of borrowers. This means that if you’re a college student, you’re likely to get a different interest rate than a businessman in his 40s. Some of this seems like common sense, and it’s easy to imagine an old-fashioned banker who simply knew everyone in the community and considered himself a good judge of character. In today’s world, however, banks have this down to a science, so the ability of one college student to get a low-interest loan depends on the aggregate risk that’s been calculated from the past pay-back performance of all college students.