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When it comes to borrowing money, whether it's in a mortgage or in a line of credit, there's one thing that's extremely important to consider: the interest rate. The interest rate is the most important thing to look at besides the actual value of the loan, and is a big factor in determining the monthly payments on the mortgage or credit card. In this article, you'll learn all about the interest rate, what it's based on and what you can do to get a lower interest rate.
The Definition of Interest Rate
The interest rate is essentially the percentage rate of fee paid on borrowed money. Lenders use this as a way of making a profit on the money that they loan
out to borrowers. Interest rates greatly vary, and are typically not the same for everyone.
What is the Interest Rate Based On?
The interest rate is based on three things:
1. Your Credit Score. A person with a poor credit score is saddled with a high interest rate, while a person with an excellent credit score is rewarded with a low interest rate. This is probably the biggest thing that interest rates are based off of.
2. Your Credit History. This is different from your credit score, but still important. If you have a lengthly credit history and an excellent credit score, then you'll get one of the lowest interest rates possible. However, if you have short credit history and a good credit score, you'll probably not get that low of an interest rate. This is because lenders like to go with borrowers
that have established that they'll pay on time.
3. Employment. You need money to pay back the loan, so it's easy to understand why your employment status can have a big impact on your interest rate. If you have a consistent job and good credit, you'll get a lower interest rate than would someone with equally good credit but no job.
Three Ways to Get Lower Interest Rates
1. Establish a Good Credit Score. It's really not that hard to establish a good credit score. All that you need to do is make your payments on time and pay above the minimum. You should also avoid using more than 30% of the available credit, and should pay as much of it off as possible every month.
2. Bargain with the Credit Card Companies. If you already have a credit card
and it has a high interest rate, then you can lower it. How? By simply calling the credit card companies and asking for an interest rate reduction. If they refuse, threaten them with the closing of your account. If they want your business, they'll oblige to your request.
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