In considering taking out a loan , there are a few things to look at:* Why do I need a loan?* What are the loan terms?
In considering taking out a loan, there are a few things to look at:
* Why do I need a loan?
* What are the loan terms?
Loan terms are:
* Loan amount
* Interest rate
* Length of the loan
And as we will see, the interest rate on a loan is a big deal, it is in fact, the deal!
Interest rates can be expressed in a few different ways, however the two ways we see them in most instances is as an interest rate, and also as an APR or annual percentage rate.
The difference between the two is that the APR is the interest rate and any additional charges and fees you may pay, and it is expressed over a period of time, which is 12 months.
This is in part why payday loans, which have high interest rates, seem to have extremely high APR’s, some as high as 2000%. Payday loans are short-term loans, usually for 30 days or less, and when you express the interest rate as an APR over a 12 month period, it gets inflated.
When you take out a loan you are expected to repay the loan, and also pay interest. So getting a low interest rate is important, so you don’t pay back more than you need to. And there are some factors that can influence and dictate what interest rates we may receive when we take out a loan.
If we apply for a loan one of the first things a bank or lender is going to look at is our credit report, our credit history and how we have repaid loans in the past.
The lender will also look more importantly at our credit score.
Our credit score is a numerical value assigned to us based on things such as how we pay our accounts, how much we owe, and how long we have credit active.
A high credit score is good, a low credit score is bad. Which means when you go for a loan, a high credit score can receive a lower interest rate. A low credit score may receive a higher interest rate.
This is due to the risk the lender is taking, a low credit score is more of a risk.
Some lenders tier the interest rates they offer based on credit scores. Credit scores of 750 or higher may receive an interest rate of say 4%, credit scores of 650 to 700 may receive a rate of 5%.
Interest rates can also change according to the type of loan. Secured loans can carry lower interest rates as there is collateral, something securing the loan.
Mortgage loans, car loans, loans for property can have lower interest rates than personal loans, or lines of credit with nothing to secure them. Unsecured loans are a higher risk, so they have higher interest rates.
When you take out a loan to buy a property, a car, or anything that can secure the loan, you are usually required to have a deposit. This deposit can be 5%, or up to 20% of the purchase price.
The deposit reduces the amount you need to borrow to make the purchase, and also reduces the lender’s risk on the loan.
The larger the deposit you have, the better your chances of getting the loan approved. Larger deposits reduce the lender’s risk, so they are more inclined to grant the loan. They also may offer a lower interest rate due to the large deposit. Which saves you money, especially in the example of a mortgage loan which can be for terms of 10 years and longer.
Equity in a property is the difference between what is owed on the property, the balance of the mortgage, and the value of the property.
An example may be you own a house valued at £150,000, and you owe £100,000, you have £50,000 in equity.
Should you wish to remortgage to a lower interest rate, having equity like this improves your chances of getting a remortgage, and also receiving a better interest rate.
Having equity is similar to having a large deposit. It reduces the lender’s risk on the loan.
There are ways to get a better deal on interest ates, and one is to start with your credit and credit score. By raising your credit score you not only improve your chances of a loan being approved, but also of receiving a lower interest rate.