There are a number of factors used by lenders that go into pricing the interest rates on a loan. These factors can broadly be broken down into two categories:
The product you are seeking
Your credit rating
In many cases, it is the nature of the credit you are seeking that will determining to a large extent the cost of that credit. Unsecured credit is more expensive than secured credit. This is because the risk taken on by the lender with unsecured credit is greater. If you can provide your home or other property as security against the loan, then you are virtually guaranteeing to the lender that there will be sufficient funds to repay the loan. In exchange for this added security, the lender will be willing to offer you far lower interest rates.
The Gamble
The gamble, which the title suggests, is the fact that you are using the one financial possession that is most precious to you, your home. If you land in financial trouble and default on your loan repayments then your family home is at risk; you could consider it a gamble because almost anything in life is possible.
The Flexible Loan
Another factor that comes under this category is flexibility when it comes to various types of loans.
A credit card is far more flexible than a personal loan. With a credit card you can really decide to borrow as much or as little as you like, within your credit limit. You can repay a minimal amount each month, or the entire balance, or anything in between. The lender is really making a certain amount of credit available to you and you have free rein to use it as you wish.
Personal loans on the other hand are for a fixed amount, over a fixed period and the monthly repayments you have to make will be fixed. This offers far less flexibility to you, but the lender will compensate by giving you lower interest rates.
Factor In Your Credit Rating
At the same time, regardless of which type of credit you are seeking, lenders will go on to take your credit rating into account before giving you a final price for the credit. If your credit rating is very poor, the lender may decide not to make a loan to you at all, or advise you to seek a different type of product, so for example, unsecured lending may not be available to you if you have bad credit, while a secured loan will be.
Determining Your Credit Rating
Your credit rating will be determined by your previous repayment habits. So if you have failed to repay debts on time, have had court judgements made against you, or if you are unemployed or just started a new job, lenders will not be confident that you will meet all of your repayments in full, and on time, and if they do decide to lend to you, they will compensate for the higher risk by charging more interest on the loan.
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