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4 Factors Affecting Personal Loan Rates

Life can take some unexpected turns — some of which leave you needing extra cash. Maybe there’s a medical emergency, an urgent home repair or you’ve decided to work on managing your high-interest debt. A personal loan can help provide the financial flexibility you need. And if your credit health is strong, it could be a smart financial choice.

Applying for a personal loan can also be new territory, especially if you’re not familiar with things like why interest rates might vary from lender to lender. So before you commit to a lender, we’ll help you understand what factors might influence those rates. That way, you can make a better informed decision when choosing a lender and perhaps have a more realistic view of the rates you could be eligible for.

1. Credit Score

While credit score is not the only measure by which lenders make loan decisions, it may be the primary factor that determines your personal loan rate. Your credit score is calculated using data from your credit reports to assess your creditworthiness or, the likelihood that you’ll repay your loans in a timely manner. It takes into consideration your repayment history, credit utilization, the length of credit history, credit mix and any new credit. Most credit scores range between 300 and 850; the higher the number, the better you’ll look to potential lenders. It’s important to have an idea of the state of your credit health before applying for a personal loan. At the very least, this will empower you with the knowledge to take control of your financial situation if necessary.

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Something else which could impact your credit score is whether a lender does a hard inquiry or a “hard” credit pull that is visible to other creditors And keep in mind that a hard inquiry might stay on your credit report for up to two years. Some lenders allow you to check your rate, triggering a “soft” credit inquiry that will not impact your credit score and will not be visible to other creditors.

Employment History and Personal Income

Other factors that contribute to determining the rate are your annual income and employment. A borrower with a good track record of employment and significant income may be seen as posing less credit risk. Some lenders have minimum income requirements. Be sure to understand those requirements as you compare loans and rates. Regardless of the amount of your salary, the key is to understand what you can afford to pay monthly.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares your recurring monthly payments to your gross monthly income, and is expressed as a percentage. For example, if your gross income is $63,500 (before taxes) and your debt totals $25,000, then your DTI is 39.4 percent. The debt may include your mortgage or rent, credit cards and other loans. Your minimum monthly credit card payment is used to calculate DTI rather than the full balance owed.

Knowing your DTI is essential to the loan application process as it can make a difference in your rate eligibility.

Read More about DTI

4. Loan Term

The amount of time agreed on by both parties for the repayment of the loan is referred to as the “loan term.” The term can vary in length and different lenders offer different loan terms. Your monthly payments will be calculated based on your loan term.   A longer term means that less money is paid each month, which makes it seem like the more attractive option. But it might end up being more expensive overall because interest accumulates for a longer period of time. In some cases, borrowers can also choose to make more than the minimum required payments and pay off the loan earlier, minimizing interest costs, regardless of the loan term. Find out if there’s a penalty for making extra payments or paying early in case you want to go that route. Whatever you decide, read the fine print carefully and ensure that the term length and repayment amount is one that you can comfortably manage.

Knowing about the factors that affect personal loan rates gives you a better chance to assess your credit health and take steps to improve your creditworthiness before you apply for a personal loan. Better credit health should result in more favorable rates. Every lender has its own process, so it is important to do research and compare personal loan rates and terms from multiple lenders before making a decision.

Learn more about checking your rates and find out how to apply for a Discover personal loan designed around your needs.

*FICO® Credit Score Terms: Your FICO® Credit Score, key factors and other credit information are based on data from TransUnion® and may be different from other credit scores and other credit information provided by different bureaus. This information is intended for and only provided to Primary account holders who have an available score. See about the availability of your score. Your score, key factors and other credit information are available on and cardmembers are also provided a score on statements. Customers will see up to a year of recent scores online. Discover and other lenders may use different inputs, such as FICO® Credit Scores, other credit scores and more information in credit decisions. This benefit may change or end in the future. FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.