Menu

Why Does the Interest Differ on Installment Loans?

The interest rate is a percentage added on to the principal of a loan that determines how much someone will pay to borrow money. For instance, if you borrow $1,000, that loan might come with a ten percent interest rate. Therefore, you will pay the creditor $1,100 total to get the loan.

Factors that Determine Interest Rates on installment loans

Interest rates will fluctuate based on a couple of factors. Credit scores, the length of the loan, the strength of the financial institution, and other terms can drive the interest rate higher or lower. Generally speaking, lenders see lower credit scores as high risk, so they will charge higher interest rates to compensate.

That said, lenders are in the business of charging the most competitive rates possible. Their goal is to provide borrowers with money while minimizing their risks and getting repayments in the future. One way to make terms more agreeable is to have a more extended repayment period, which will lower the overall interest rate for the loan.

Of course, interest rates will also vary based on the type of installment loan. Student loans, small business loans, and mortgages fall into the same category but can yield different interests. More often than not, a borrower’s credit history will be the most significant influencing factor.

What Interest Rate Can I Get on an installment loan?

Interest rates are a complex and highly personal number, so it is challenging to estimate what you might get. Generally speaking, the best way to find out is to apply for a loan. Creditors will use soft credit checks so that it won’t hurt your credit score. Plus, the application is free.

According to the Federal Reserve Bank of St. Louis, the average interest rate is 10.6 percent. Note that this applies to two-year loans made in May 2019. If the repayment period is longer than 24 months or you have a near 800 credit score, you can expect even lower rates.

Writer

Vivaan Marsh is a professional writer, editor and an expert in personal finance. Her career as a professional writer stretch for over 11 years. One of her passions in life is to help everyday families with there financial problems, making their life a bit easier and explaining complicated topics in an easy way. Read more >

Write a comment

All fields are required

Comment

Main menu