What does the interest rate on a consumer loan depend on?
Each bank has its own methodology to calculate credit product interest rates. When determining the rate of interest, a large number of parameters are taken into account – from the Central Bank key rate to the possible risk of default. On the basis of these factors are set the minimum and maximum values of the rate. The interest at which the loan will be granted to a particular borrower will be selected from the gap between them. Today, with the support of myfin, we will delve into this question in more detail.
How an individual affects the interest rate
When reviewing loan applications, each borrower is considered individually. First of all, his credit history, the amount and frequency of income, including cumulative, the presence or absence of current debts and other attributes that may speak about the solvency of the client are taken into account. A person with a positive criminal record and a stable official income is more likely to receive a reduced interest rate. Collateral, such as a pledge or a surety, will also lower your interest rate.
The Key rate of the Central Bank of the U.S is a tool of regulation in the financial system of the country. For the last several years the key rate has been at the level of 0-0,25%. This means that financial market participants can deposit or borrow money from the regulator at a set key rate. The higher it is for the bank, the higher will be the interest rate on a consumer loan. In such a situation, it is more difficult to take credit, and the demand for it falls. When the key rate is low lending, on the contrary, becomes more accessible. Thus, central banks in different countries can regulate the amount of money in circulation, stimulate consumption, and influence inflation.
Influence of insurance on the interest rate
Additional conditions, not related to the solvency of the borrower, also affect the rate. Usually it is registration of additional paid services – most often personal insurance of the borrower. If you refuse them, both in the process of obtaining a loan, or after the loan is disbursed, the bank may set a surcharge to the rate of interest. The amount can be from 0,2-0,5 to 1-1,3 percentage points, depending on the conditions of the product.
Influence of salary on the interest rate
Also, the rate depends on the category to which the client belongs. Often, banks provide discounts for borrowers who receive their salaries on their cards or hold deposits in them. In this case, the lender will have more confidence in the solvency of the client. Banks can also set reduced interest rates for certain categories of customers – for example, pensioners or military personnel.
What to pay attention to
When choosing a loan, pay attention not only to the size, but also to the range of interest rates. The greater the range between the minimum and maximum interest, the more difficult it will be to get favorable terms for the borrower. Also, find out what associated fees and commissions – for example, for cash withdrawal or for additional services – are available when taking out a loan. Minimum rates are usually available only to regular customers with a sufficiently high income and a positive credit history.