Nowadays with the widespread of lending institutions, the great offers are provided by lenders to lure the borrowers to grab them particularly in the aspect of interest rates. When we are shopping for a loan, it would naturally seem that the lower the interest rate would be the better deal. However, that may not always be true, for number of reasons, and one of those reasons is that sometimes the interest rate we receive on a loan is outside of our budget. When you avail a loan, there are a few components that make-up the loan itself such as how much you are asking to borrow, how long you wish to borrow the money for, your credit score and credit history and the rate of interest. The rate of interest for a loan is important to the borrower, as it determines how much the loan is going to cost you. The higher the interest rate, the more money the lender makes off the loan. This fact makes a “Lower Interest Rate Loan“ seem like a better deal but the amount of interest depends upon the repayments period of the loan.

What Determines the Interest Rates on Loans?
Every lenders use various criteria to determine the interest rate for a loan such as loan amount, term, and credit scores. For instance, if the loan has a low interest rate, which seems appealing, but the term is only 12 months, then it draws high monthly payment which may not be a best deal for you. So a shorter term means lower interest rate, but higher monthly payment whereas a longer term means higher interest rate, but more affordable payments. Most of the lenders use the tenure as a strong basis for the rate offered as shorter term loan means lender will get their money back quicker.

Credit Score: Your credit score can be used to determine the interest rate for a loan. Higher will be your credit score, then lower interest rate you can receive for a loan and vice versa. Sometimes the interest rates are negotiable; you can always ask the lender about lower interest rates. If you have bad credit and need a loan, you will be considered a high risk, you will be charged a higher than usual interest rate.

Early Repayment Penalties: If a lower interest rate is a better deal or not, we need to be aware of how long we will be paying the loan back as well as early payment charges or pre-payment penalties. The percentage or fee can change on a sliding scale depending on how early we “Repay the Loan“. To exemplify, if we have a loan that was to be for 36 months, and look to pay it off in 12 months, the pre-payment penalty may be higher than paying the loan off early after 24 months. The reason for these pre-payment penalties is due to the fact that every lender expects to be earning a certain amount of interest during the full term of loan.

So shopping for a loan can get complicated, if we get attracted towards what may seem to be a low interest rate, but remember there are other factors to take into consideration while applying a loan.