Understanding Interest Rates

What kind of interest rate your receive for your personal loans is going to be determined by three major variables. Having knowledge about these factors will not only save you money and time, you will avoid frustration of applying for loans that you do not qualify for.

The Federal Reserve Discount Interest Rate
Lending institutions and banks borrow money from the Federal Reserve Bank. The rate that the Federal Reserve Bank charges financial institutions for borrowing funds on a short-term basis is called the 'discount rate'. The discount rate is established/set by the board of directors of the Reserve. Discount rates have an immediate impact on the 'Prime Interest Rate'. Prime interest rate is the rate banks charge consumers on short-term personal loans. The prime changes daily and can be obtained in real time by visiting PrimeRate.net.

Of all the major influences of interest rates, this is the factor that you will have the smallest amount of control over.

FICO Scores and Credit Reports
The CRAs (Consumer Reporting Agencies) collect and sell information on where you live and work, all of your bill paying activity, and whether you have filed bankruptcy or been arrested or sued. The major CRAs are Transunion, Experian and Equifax. Whether it be a soft or hard credit pull, all lenders out there is going to pull your credit report at some point during their underwriting when determining whether or not to lend you money.

Your FICO score is a scoring method that compresses your credit history into a single number. This score is used to determine the probability that you pay your bills. Get more info on how FICO scores are computed.

You can ensure a high FICO score and positive credit report by paying your bills timely ever month and by never over-extending yourself. In addition it is important that you know what is on your credit report before you apply so that you can fix your credit by removing any negative and/or outdated info. Getting a copy of your credit report regularly (at least once/year) is important. Click here to get a copy of your credit score (your credit report is included).

Learn more about maximizing your borrowing power with a strong credit score.

Competition for Your Business
Every lender is in the business of lending money in order to generate a profit. The lending industry is extremely competitive. As a result, they will determine what profit margins they aim for based on the competitive factors. They run the risk of going out of business if they do not charge enough based on the prime rate and your credit. If they charge you too much, then they run the probability of losing you as a client. Therefore, if you want to get the best deal, it is important that you practice effective loan shopping.

When shopping for your loan is very important that you understand that every time you apply, an inquiry is going to show on your credit report. The more inquiries in a certain period of time, the more adversely effected your FICO score is going to be. That being said, applying for too many loans/having too many inquiries in a small time frame is going to be counterproductive. When applying for personal loans online, your credit report will usually not be run until after their initial quote is accepted by you.

In summary
Prime rate, your FICO score (credit history) and competition for your business are the three major variables that are going to effect what sort of interest rate and terms you receive for your unsecured loan. The two most important things you can do to ensure that you get the best loan is to pay your bills on time every month and shop around with different lenders.

Related Reading:
-Tips For First Time Borrowers
-Getting Approved for Favorable Bad Credit Loans
-Are Online Loans Safe?
-Advantages of Online Loans
-Impact of Defaulting
-Unsecured vs. Secured Loans
-Tips For Reducing Common Types of Debt
-Advantages of Personal Loans
-Advance Fee Loan Scams
-Loan Aspects to Avoid