Interest rates are one of the most important factors when applying for a loan. The interest rate is how much money you’ll have to pay back in addition to what you’ve borrowed. Interest rates vary by credit score, loan type and lender. So it’s essential to know your options before choosing a loan product and lender.
Loan interest rates are the cost of borrowing money. Several factors, including the following, determine them.
- The type of loan you’re taking out (a mortgage or auto loan, student loan, for example)
- Your credit score and history as a borrower
- The lender’s willingness to lend you money at all
- Your credit score is a number that represents your creditworthiness. If you have good or excellent credit, for example, you may be able to get lower rates than someone with poor or fair credit.
- Loan types can also impact interest rates. A mortgage loan has different rates and terms than an auto loan, so it’s important to know what type of loan you’re getting before deciding on an interest rate.
- And lastly, lenders have different rates and terms—so shop around!
For example, the government sets the typical interest rate on student loans each year.
According to Lantern experts by SoFi, “The government sets the interest on student federal loans. If you are in school now, the government has set the federal student loan interest rate for undergraduates at 3.73% for the 2021-22 school year. The direct unsubsidized loan rate for graduate or professional students is 5.28%.
You might have heard the term “interest rates” thrown around a lot, but it’s not always clear what they are or how they work. Interest is the cost of borrowing money. It’s calculated as a percentage of your loan amount, and it varies depending on several factors:
- The type of interest rate you choose
- Your credit score and debt-to-income ratio
- The type of loan you’re getting (home mortgage or auto)
If you’re willing to accept the risk that interest rates will rise, you might be able to get a better deal by taking out a variable-rate loan. But if you want predictability and don’t want to worry about your monthly payments changing, consider locking in a fixed rate instead. The problem is that it can be tricky—or even impossible—to predict future interest rates. If rates go up, your payments will rise too—and vice versa if they fall.
A number of lenders now offer mortgage products with both fixed and variable rates; these are called hybrid mortgages and allow borrowers to take advantage of both types of loans at once.
If you’re paying too much in interest or feel like you haven’t been offered a good deal, don’t worry. You can negotiate and shop around for a lower rate.
If the bank doesn’t give you a better deal, consider refinancing your loan with another lender. As long as the terms of your current loan allow for it, refinancing will likely get you a lower rate and save money over time on interest payments.
When shopping for loans or refinancing existing ones, compare rates across multiple lenders to ensure that one doesn’t have an unfair advantage over another. This is where you can get started. You know the basics of loan interest rates and now you’re ready to shop around for a better deal.