Understanding Interest Rates

Interest rates are the cost you pay your lender for your loan. When applying for a personal loan, it's important that you understand what interest rates are and how they work.

The Federal Reserve Discount Interest Rate
Money is borrowed by banks and lending institutions from the Federal Reserve Bank. When lending funds, the rate the Federal Reserve Bank charges these borrowers on the short-term basis is called the “discount rate”. The directors of the Reserve set the discount rate, which has an immediate influence on Prime Interest Rate. The Prime rate is what banks charge to consumers when utilizing personal loans. The Prime rate fluctuates daily and can be viewed in real-time at PrimeRate.net.

Credit Reports
There are three major credit bureaus; Experian, Equifax and Transunion. They all collect and sell your personal info data, including but not limited to your history of bill paying (whether you've been late, delinquent or if your account is current), where you work and live, if you've ever filed bankruptcy or if you've been sued or arrested. No matter if lenders are performing and hard or soft pull of your credit, when determining whether or not to fund your loan request, every lender is going to pull your credit at some point of their underwriting process.

Your credit score, aka as your FICO score, is a scoring technique that condenses your total credit history into one number. This number is a grading that determines you potential of paying your bills. As long as you practice positive account history by paying your bills timely and in full every month, and don't utilize too much of your available credit limits, you can expect that your credit score will be favorably high.

If you don't know what your credit score is and/or haven't viewed your credit report in some time, considering obtaining a copy of your credit report and score prior to applying for a personal loan. You want to make sure your report is current, free of errors and/or outdated information. If when you do get your credit report and score, you witness info that needs to be corrected, make sure you do so before you apply. You don't want to obtain less than desirable rates and terms or even worse, get declined for your request, because of misinformation on your credit report.

Lender's Fighting For Business
Lenders have extremely complex systems in place to not only determine what sort of applicant they want to approve and fund, but also, what their interest rates need to be in order for them to be profitable in their business of personal loan lending. And as a result of their being a large abundance of lenders in the online loan industry, lenders will push their potential profit margins to the lowest possible values for the intent of offering their lowest possible rates, and gaining the business they are striving for. It's a fine line…if lenders don't charge enough interest, and in turn enough profit, they run the chance of not being profitable. On the other hand, if they present potential borrowers with interest rates that are too high, there is a good chance that they will lose business to lenders offering better rates and terms.