Which factors can affect your interest rate & how one can improve

Every personal loan applicant gets a different but personalized interest rate which is influenced by a number of factors. No matter you are looking for debt consolidation, car financing, or medical loan each person will get a different rate.

How my interest rate will be affected by different factors

Each lender has its own custom methods to measure the risk levels in any given application. A higher rate will be offered to people with bad credit or large amount then you actually deserve. The most considerable factors are;

  1. Credit profile
  2. Type of loan

Factors affecting interest rate

How interest rate is affected by credit profile or credit history

A credit report is used to determine the level of risk involved when giving you a loan. Each financing company looks in to different aspects of a credit report but here we will discuss the most crucial and important points.

  • Missed Payments & Charges: If someone have a recent history of skipping payments or late payments, then it is a strong indicator that he/she will do same in future. Lenders typically do not give any room for unexpected situation or anything else. So, one should make it sure to keep on track with the payments as it can affect you in future.
  • Debt/Income ratio: D/I ratio determines the monthly debt amount against your given monthly salary or income. This helps to measure the convenience and probability that you will pay off the debt in future.
  • Short credit history: This means that either you have very little credit history or no track record at all, so its very difficult to guess how the person is going to handle the payments.
  • Credit Utilization ratio: It is the amount of credit you are using against your available credit limit. If this ratio is higher than 30% then the lender typically consider a person less responsible and at higher risk of financial uncertainty.

All the above factors are considered as most important to take your credit score at the height of sky or down to earth. Few factor will influence your credit score in relatively short manner however, other may affect you badly and will pertain for a bit longer. However, credit score can be improved with some efforts but it varies person to person. People with short credit history often have to strive for a bit long to make some history i.e. for 2 or 3 years.

How interest rate is affected by loan type

There are two types of loans available in the market namely

  1. Secured loans
  2. Unsecured loans

If anyone applies for a secured loan while offering any collateral as a guarantee, then typically the lender will take such case with low risk involved as there is a guarantee in case borrower is not able to pay back. Such an applicant will get a lower interest rate. While on the other hand unsecured loans are easily available and the process is quite simple. Anyone can apply and get an approval for unsecured loan but he/she must needs an average credit score. As there is no collateral in such loan types therefore, the risk is higher and so is the rate of interest

Common secured loans

  • Home equity loans
  • Auto equity loans

Common unsecured loans

  • Personal loans
  • Credit cards
  • Payday loans


Your credit score and type of loan can affect your rate of interest directly. Therefore, it is always a wise move to go for debt consolidation and pay your credit card bills by using a personal loan at lower rates. Most often such moves help a person to save almost thousands on bills in terms of interest payments.

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