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Bank Loan Interest Rates
21 Feb 2019

How are Bank Loan Interest Rates Determined?

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About 24 million Americans are likely to take out a personal loan this year.

What are we borrowing for?

The short answer is that we need stuff. Bills, car repairs, hospital expenses, and tuition payments sneak up on us fast and require immediate attention. We have no choice but to fix our vehicles, set our broken ankles, and get back to living productive lives.

Yet we all know that borrowing money does not come without a cost. Bank loan interest rates can be high, higher than most other loans such as installment loans, and it may be confusing to figure out exactly how much you will be paying for the chance to borrow someone else’s money.

How is your bank determining your interest rate? Let’s take a look.

Your Credit Score

Your credit score is the biggest factor in determining your bank loan interest rate. In 2019, rate amounts range from 10% to 28%.

The higher your credit score is, the lower your rate of interest will be. Those with excellent credit have FICO scores between 720 and 850. They should be able to get loan rates between 10% and 12%.

Those with FICO scores between 680 and 719 are considered to have good credit. They can expect to find interest rates between 13% and 15%.

Average FICO credit ratings are between 640 and 679. Folks with these scores should be able to secure loan rates between 17% and 19%.

Finally, those with poor credit have FICO ratings between 300 and 639. Interest rates for those with scores in this category will be somewhere between 28% and 32% on a bank loan.

Debt-To-Income Ratio

While your credit score will play the biggest role in determining your interest rate, debt-to-income ratio will also factor in. This is the amount of debt you carry each month, including household payments, as it relates to your monthly income. It is calculated pre-tax.

Length of Your Loan

The length of your loan will also affect your interest rate. Longer terms and higher loan amounts will mean higher annual percentage rates (APR’s.)

Paying Off Your Loan

The bank will calculate your interest and principal in order to create a regular payment schedule that will allow you to pay them both off together.

You can choose how often you make your payments. They can be filed monthly, bi-monthly, or weekly.

The more frequently you make payments, the less interest you will have to pay. Yet if you choose to pay off your loan weekly, you need to be sure that your budget can support it!

Be aware that your payments go toward paying off your interest first, and what is left over goes toward the loan principal. Therefore, making higher payments than is required each month will help you to pay down the actual loan amount faster.

Knowledge of Bank Loan Interest Rates

Knowing how to determine bank loan interest rates will help you to make informed decisions when you are bank-shopping. You will also be more prepared for the kinds of rates and payments to expect.

For more information, read more of our blog today.

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