Interest Rates for Personal Loans based on Credit Score
It goes without saying that every now and then you might find yourself in a situation in which you might need a little bit of help with your finances. It is in times like this where people oftentimes find themselves looking for a personal loan as a way to get past the hard times. You could look for a secured or an unsecured loan, depending on whether you want to put up collateral.
Regardless, though, of what type of loan you will decide to go for, your credit score is going to have a serious impact, especially on the interest rate.
The Factors which Matter
According to FICO – a company which is providing the most reliable and popular formulas for credit score calculation, there are five factors which are going to have an impact on the credit score.
- Payments History: 35%
- Amounts owed: 30%
- Length of your credit history: 15%
- New credit: 10%
- Credit mix: 10%
As you can see, the length of your credit history, according to FICO, carries about 15% of the weight when it comes to your credit score formation. This is something worth accounting for.
Now, a lot of people tend to believe that getting a personal loan could actually drag your credit score down but that’s not really the case. Sure, the amounts you owe are going to have an impact, but once you’ve paid it up and you’ve done so without any delays, this is going to have a beneficial impact on your credit score.
Interest Rets: How Does it get Affected?
It is important to understand that the interest rate is directly affected by your credit score. You can take a look at this resource which shows that the best interest rates are given to the best credit scores. Of course, there are other factors that have to be taken into account.
Based on Orchard Platform that collects data from major online lenders, below are the interest rates for personal loans by FICO from Q1 2014 to Q1 2017:
|Origination||Q2 14||Q3 14||Q4 14||Q1 15||Q2 15||Q3 15||Q4 15||Q1 16||Q2 16||Q3 16||Q4 16||Q1 17|
Borrowing only as Much as You Need
Regardless of whatever the reason may be, it is very important to make sure that you’ve limited the amount of money that you borrow to the actual amount that you need. This is something quite critical.
You can turn to a personal loan as a way of consolidating your debt and making it a lot easier to pay it off. At the same time, you might use it to smoothen up the cash flow while you are currently restructuring your finances. Regardless of the reason, it is important to note that you would have to borrow as much as you need and make sure that you avoid paying it late.
Keep in mind that lenders, as well as other financial institutions, are going to take a look at your credit file in order to find any potential red flags. If you have a very large personal loan, that might hurt your ability to get any other credit or financial products. This could happen even if you have a perfect credit score.
This is due to the factor called risk assessment. While, in theory, your credit score might be off the charts, you might be seen as a risky borrower because you might have taken more than you can afford to pay up in a sustained and long-term manner. This is something that has to be accounted for.
With this said, it is important to note that you would have to keep quite a few things into account. While interest rates are directly correlated with the credit score, they are also correlated to other factors as well.
Stilt provides loans to international students and working professionals in the U.S. (F-1, OPT, H-1B, O-1, L-1, TN visa holders) at rates lower than any other lender. Stilt is committed to helping immigrants build a better financial future.
We take a holistic underwriting approach to determine your interest rates and make sure you get the lowest rate possible.