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Friday, February 4, 2011

How to get good rates on loans: How much to take out, how much to pay off

Low rate loans reduce the cost of debt
Lower loan rates make faster payoff more possible
Low rates on loans add up to less cost for the borrower and that is important when obtaining a loan whether it is for a vehicle, business, home or other purpose. Several factors go into achieving a low rate on a loan and understanding these variables can be key to acquiring the best loan rate possible.

Loan choices and several low loan rate determinants are discussed in this article in addition to cost related aspects of loan amount and payoff. In other words, obtaining the right loan, with a good interest rate and how to manage the loan involves assessing contributing factors to low loan rates and choosing the right loan based on those contributing factors.

Contributing factors to low-rate loans

Loan rate ranges vary between types of loans; for example, new car loan rates can vary from 4.5%-6% dependent on the length of the loan term whereas credit card loans can range from 9%-20%. For each category of loan, a range of rates will often exist which gives you the loan borrower a chance to obtain the lower rate in that range. Typically, some of the factors that influence the rate a loan will achieve are listed below:

• Good credit rating and score
• Low debt to income ratio
• Economic environment
• Choice of financial institution
• Type of loan

Choosing the right loan

Being aware of loan rate readjustments, terms of agreement, and financial institutions' business approach and risk tolerance can also affect loan rates including interest on business loans. In other words, a newer bank or bank interested in increasing its revenue may adjust rates to stay competitive and attract more business if the increase in loans outweighs the loss of revenue from utilizing a lower interest rate. Refinancing a loan may also present loan borrowers with an opportunity to lower loan rates.

Choosing to apply for a loan and requesting the right amount for a loan can also be important because the loan amount will not only factor into how much the minimum loan payments will be, but how practical and feasible these payments are. Moreover, paying off too much of a loan too early may be disadvantageous if that money can be used to earn more money to pay off the loan elsewhere.

To illustrate, if a fixed rate car loan in the amount of $10,000.00 with a monthly payment of $42.00/month and no prepayment penalty is paid off in full within the first few months of the loan, and the loan borrower also wanted to re-model a section of their house, the benefits and opportunity associated with remodeling the house may be lost by paying off the loan too early.

Individual and bank debt to equity comfort zones vary meaning a ratio of .l or less than 10% may be required by some persons or financial institutions in order to issue the loan, but others may facilitate loans with much higher ratios. Generally, a fiscally responsible financial institution will not make a loan, unless they believe it can be paid back with relatively low risk.

In the case of credit cards, the risk may be higher based on the credit rating of applicants, so interest rates can rise more dramatically for these types of loans. Another rule of thumb is the size of the loan affects the availability and ease of getting a loan. Larger loans such as mortgage loans involve greater risk so more paperwork, financial reporting and review of the loan applicants borrowing capacity can take place.

In summation, loan choices vary and can benefit for a little insight into the loan process, how loan rates are determined, what the loan will be used for and when. All the variables in the loan decision play a role in an invisible equation of risk, opportunity, affordability, and relevance of the loan.

Assessing one's own individual, family or business financial needs and capabilities is a key part in determining if the loan will be approved and how necessary or useful a loan can be. Sifting through bank rates, debt levels, credit ratings, loan payment plans, and use of capital can be time consuming, can also be a valuable asset in acquiring a good loan and affordable loan interest rate.

Image license: 401(K) 2012, CC BY-SA 2.0

1 comment:

  1. It is very difficult to find a good loan with low rates. Today almost all loans have very high rates. The best idea for paying back these rates it’s taking online loans. You can click here now and get financial help. These loans are very good helpers in difficult financial situations. With the help of these loans you can pay back your car loans or mortgage. Of course it will take a lot of time for paying back these loans but it is possible.