Loan rate is the most important aspect of any loan as it is the only determinant of the affordability of a loan. Irrespective of whether a loan is secured or unsecured, loan rates or interest rates play a vital role in helping the customers the quality of a loan. Loan rates vary from one lender to another and from one loan to another – this is the only element that carries forward the competition among lenders. Loan rates depend on a variety of factors like the loan amount, loan term, credit history, collateral etc.
Borrowers need to keep in mind that the low rates should be one of the most important driving forces while making a choice of the loans. Loan rates show the actual money a borrower will have to repay to the lender within a stipulated period of time. Higher rate of interest on loans or higher loan rates will eventually lead to higher repayments. APR or Annual Percentage Rate is also the other term used for referring to the loan rate and this varies with every lender. For instance, short term loans often have a high rate of interest whereas a long term secured loan from any of the big lenders in the market would be lesser. The repayment term or loan term often single handedly determines the loan rates.
Apart from the loan term, the loan rates also depend on a variety of factors like the type of loan and the circumstances under which the borrower applies for a loan. The smaller amount of money is often backed by a higher rate of interest whereas the large sum of money carry lower rate of interest. The simple logic behind this is that the borrower will have to bear the same cost and compensate for the lenders money. The borrowers who have bad credit scores are less likely to find loans at lower loan rates; majority of the lenders see the lending as a big risk and charge higher loan rates when the credit scores are poor.
There are basically two types of loan rates prevailing in the market – fixed rate and variable loan rates. The loan rates that remain fixed during the loan term are referred to as fixed rates and the ones that vary with the changes in the base rates offered by the central bank are known as variable costs. Both the loan rates come with their own set of advantages and disadvantages, so borrowers need to make a very informed while applying for a loan.