When you borrow money, one of the most important things to consider is the interest rate you will pay. This is the money you pay to the bank in exchange for them lending you money. It’s like a fee. You never see him again.
But it is much more. It is determined by three main factors.
1. The Federal Reserve discount interest rate.
The first factor, the Federal Reserve discount rate, actually has nothing to do with you. It is totally out of your control. Banks and other lending institutions don’t just lend you money. They have to borrow this money from the Federal Reserve Banks. The discount rate is the interest rate that the institution pays to the Federal Reserve Bank for a short-term loan. The rate is determined by the directors of the Federal Reserve Banks.
When Fed managers raise or lower interest rates to keep the economy healthy, almost all lending eventually reflects these changes. The discount rate has a direct effect on the prime rate charged to business customers with high credit ratings.
2. Your credit report and score.
This is where it can really impact your score. There are three main companies that collect and sell information about where you work, where you live, how you pay your bills, and your financial history: Experian, Equifax, and TransUnion. These credit bureaus keep a close eye on you. They are in close contact with all banks and lenders.
Every time you apply for credit, car insurance, or an apartment, your credit report will be pulled. Your report will list all the loans you have now or have had in the past. The repayment of these loans is also listed. If you missed a payment by more than 30 days, it will appear. And it will have a negative impact on your report. And your credit score.
Your credit score tells the lender how likely you are to pay your bills. If you have a high score, you are likely to be a good borrower. If you have a low score, there is a chance that you will default on a loan. This shows the lender what type of risk you are running as a borrower.
You can keep your report clean and your score high by paying your bills on time and using your credit wisely. Make sure you know what’s on your report, as almost everyone in the US will have false information on their report in their lifetime.
3.Lender business.
Banks and lenders don’t lend you money to be nice. They are in business to make money. They live in a competitive world and are looking for good deals. They don’t want to charge too much, they won’t attract people. But if they charge too little, they can’t make a profit.
That’s why you should shop around. But be selective. If you let all the lenders in town get your credit report, your score could go down. Three or four credit inquiries in a short period of time is typically as far as you can go. You can get initial quotes from lenders before they pull your credit.
All three factors determine how much you will pay to borrow money from a bank or other lender. To get the best possible rate, and pay back the least amount of money, you must work to maintain a high credit score and take the time to shop for the best rate.