When you are borrowing, the bank sets your interest rate individually. This means that they make an assessment of each application and offer an interest rate that they feel is right based on your financial and payment capacity, etc.
But what is it that the bank looks at when they set your interest rate and how does it differ from what others are offering?
One of the reasons why it can be a bit tricky
To keep track of exactly what it might cost to take out a private loan is that there is no fixed / fixed interest rate that you know you are getting. It’s not like a mobile subscription or similar where you know exactly how much you have to pay each month, so it’s harder to compare.
This can actually be a bit of a problem with individually set interest rates precisely because it poses a problem when trying to look up who has the cheapest loan.
Just like when you buy insurance or buy a car
You want to investigate the market, but it is much more difficult to get a good overview when there are no set prices exposed, but everything must be determined only after you have applied. It can be a good ploy to use a loan broker in this case, since you can at least compare interest rates from the banks and lenders connected to the specific loan broker that you have used. If you want to try it yourself, you can read more about comparing private loans with Advisa.
When you apply for a loan, the bank looks at you and your finances to determine what is a reasonable interest rate. Everything is about figuring out the risk when they lend money.
The lower the risk to the bank, the better interest rate you can normally get. Another thing that can come into play is also how big a loan you want as the bank intends to settle for a little lower interest rate on large loans – since they will still make more money overall on the big loans compared to the small ones.
Most important when the bank decides your interest rate
When you apply for a loan, the bank does a credit check to see how it is doing with your finances. There they find out many interesting things such as your income, your existing debts and some other useful things. All this is used to determine whether you should be able to borrow and also what interest rate you will receive if your loan application is granted.
Here are some of the most important things that affect what interest rate you can get:
Of course, your income affects what you can get for interest. The higher the income, the better in most cases because it usually means that you have more money to move around. It is a big advantage if you have a fixed income and not just occasional income.
However, it is not only the income itself that matters but also what expenses you have – for the most important thing is actually how much money you have over each month. If you have a high income but also make a lot of money each month, you may not have such large margins in your finances and then the question is how well you can get a new loan.
All existing debts cost you money and the more debts you have, the greater the risk that you will have trouble paying off a new loan. Many loans can also be a sign that you have bad own assets as you have to borrow for everything you want to buy plus it also shows that you like to spend over your assets. If you want a lower interest rate, it is clearly better if you stay away from too many debts and this applies to all types of debts such as loans, credit card debts and installment purchases.
Of course, how much money you receive is important, but it does also matter how much you spend each month. As I wrote in point 1, the most important thing is how much money you have left over when you deduct all expenses from the income. It is what “profit” you make in a normal month that really matters because it is what affects how much extra expenses you can incur, for example in the form of payment on a new loan.
Your credit rating always plays a role in borrowing. Creditworthiness is a kind of aggregate assessment or rating of your financial strength. The credit score gives you a certain score and the idea is that the lower the rating, the less risky it is to lend to you. The banks look at the credit rating and if you have a bad rating it can mean a direct no.
In most cases, the banks make an individual assessment and then look at other things to see how the income is, etc. You may not be denied a loan just because you have a bad credit rating but can clearly affect what interest rate you receive.