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Interest Rate
When you take out a loan, the key aspect that you need to focus on is the interest rate that will be applied to the loan as this will have an enormous impact on your life for the duration of the loan. The interest that you pay on a loan is determined by a handful of factors – read on to find out what the main ones are and how you bring the rate down.
Credit History
When you are applying for any type of loan, one of the main factors that will determine if you get approved and the rate that you pay will be your credit score. It is possible to improve your credit rating but it can take some time, so you should always check your score well in advance of applying for a loan. A few of the best ways to improve your score include registering to vote, clearing debt, paying bills on time and checking the report for errors.
Loan-to-Value (LTV) Ratio
When it comes to a home loan, the loan-to-value ratio will also play a key role in the amount that you pay. Putting down a larger down-payment (between 10 and 20%) can bring down the quantum of the loan, which will also help to reduce the interest rate as there is less credit risk with a smaller loan.
Interest Rate Type
There are also different types of interest rate that you need to familiarise yourself with. Fixed-rate involves paying the same amount for the duration of the loan while a variable rate allows the lender to change the interest rate during the agreement (based on the fluctuations in the market base rate). Mixed interest rates, meanwhile, usually start off fixed and then switch to variable at some point during the agreement.
Type of Loan
There are also different types of loan that will determine how much interest you pay. A homeowner secured loan will usually have a lower interest rate to an unsecured loan as there is less risk to the creditor as the debt is linked to the property. Unsecured loans are a greater risk to the lender, so interest rates are higher and they are harder to qualify for.
Income Stability
Along with your credit rating, income stability is another key aspect that financial institutions will look at. Those in stable, well-paying roles will be less risk and will be able to secure low-interest loans, but that is not to say that there are no options for those in less-stable employment, such as self-employed workers, although interest rates could be higher.
These are a few of the main factors that will determine the interest rate that you pay on a loan but there are a few others to consider too.
