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Interest Rate Determination Three Key Factors

Aug 17, 2007
There are several factors which influence how much money you will pay in interest for a loan. However there are three major influences: the federal reserve discount interest rate, FISCO score and credit report, and lender business factors. Understanding each major factor will allow you to chose which loan is right for you and avoid high fees and frustration.

The federal reserve discount interest rate refers to when banks and other companies borrow money from the Federal Reserve. These lending companies are offered a discount rate from the Federal Reserve because they borrow money on a short term basis. The federal reserve discount rate is set by the board of directors of the Reserve Banks. The discount federal reserve interest rate influences the prime rate. This is the interest rate that lending companies charge clients with high credit ratings. Most banks will offer customers a prime rate plus 1% for example.

Obviously this factor is completely out of your hands and you have no control over the decisions made by the Federal Reserve.

The second factor is your FISCO and Credit Report. There are companies which gathering and also sell personal information about your spending and living habits. They monitor how you pay your bills, if you have been arrested, or filed bankruptcy. These companies are called consumer reporting agencies. You have heard of the Credit Bureau, which is just one of a thousand other credit reporting companies. When you apply for a loan, the lending company will contact the Credit Bureau. FISCO score of credit score is a number which takes all the above factors into account and condense your risk as a borrower into a single number. The higher your FISCO number the better interest rate you will get on loans.

There are also several factors that affect interest rate depending on which lending company you choose. Obviously, banks and other lenders, want to turn a profit. They each exist in an extremely competitive market therefore they have to balance their profit with competitive factors. If a company charges too little they are going to risk not making enough money. If they charge too much they will probably lose customers to another lending institution. When looking for a loan shop around and make sure that you are getting the best available deal.

Additionally, the number of times your credit report has been accessed in a particular amount of time can also effect your FISCO score. Therefore, do not apply to every loan company in town, make a list of your top four choices and apply only to them. Most Online lenders will not access your credit score until after they have given you a quote. Remember you must share your social security number and therefore should be extremely careful in what companies you share this information with.

The three major factors which effect how much your loan interest rate will be are prime interest rate, credit history, and current business conditions. Make sure you keep a good credit history by paying your bills on time and shop around for the best loan interest rate.
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