The Three Largest Factors In Your Interest Rate

There are three major factors that affect how much you pay for a loan.
Understanding these factors can save you time, money and frustration.

1. The Federal Reserve Discount Interest Rate.

Banks and other lending institutions borrow money from the Federal
Reserve Banks. The discount rate is the interest rate a Federal
Reserve Bank charges eligible financial institutions to borrow funds
on a short-term basis. This rate is set by the boards of directors of
the Federal Reserve Banks. The discount rate has a direct effect on
the "Prime Interest Rate", which is the interest rate on short-term
loans that banks charge their commercial customers with high credit
ratings. You can get live information on the current Prime Rate at
www.FedPrimeRate.info.

Of the three major factors that affect your interest rate, this is the
one you have the least amount of control over.

2. Your FICO Score and Credit Report.

There are companies that gather and sell information about information
on where you work and live, how you pay your bills, and whether you've
been sued, arrested, or filed for bankruptcy. They are called Consumer
Reporting Agencies (CRAs). The most common type of CRA is the credit
bureau. Potential lenders will get your credit report from the credit
bureau.

The FICO score is a method of determining the likelihood that credit
users will pay their bills. It condenses a borrowers credit history
into a single number.

You can protect your FICO score and credit report by paying your bills
on time and not over-extending yourself. You also have the right to
have false information removed from your credit report.

3. Lender Business Factors.

Banks and other lenders are in business to make a profit. They also
exist in a competitive market. Like all businesses, they will balance
their profit margin with competitive factors. If they charge too
little, based on your credit history and the prime rate, they risk
going out of business. If they charge too much, they risk losing you
to a competitor. Therefore, in order to get the best deal you can, you
should shop around.

Keep one thing in mind when you are shopping around. One of the things
that affects your FICO score is the number of times your credit report
has been accessed in a certain period of time. Therefore allowing too
many potential lenders to run your credit report in a short period of
time could be counterproductive. Three or four is typically a safe
number. If you request an on line quote from several lenders, they
won't typically run your credit report until after they have made
their initial quote.

(You must explicitly provide a potential lender with permission to run
your credit report. For that, they usually need your Social Security
Number.)

In summary, the three major factors you pay for a loan are the prime
rate, your credit history (FICO score) and business conditions such as
competition. In order to get the best rate you can, you can do two
things, keep up a good credit history by paying your bills on time,
and shopping around for the best rate.