How is The Interest Rate Determined For My Loan?

When you are seeking out a loan, be it a mortgage, a loan to buy a car, guarantor loan, even a credit card, there are some components to borrowing and lending that are universal.

Things like:

* How much you are asking to borrow or loan amount

* Interest rate or APR/annual percentage rate

* Term of the loan, or how long you are borrowing the money for

These components all go together, along with a few other lesser critical pieces, to make up your loan.

A question that many borrowers ask is, what will be the interest rate on my loan? How is the interest rate calculated or determined?

As we will see, the bottom line is that things like the interest rate are determined by the lender using a variety of ways and formulas, and while we have some say in this, it really is mostly in the lender’s control.

Interest Rate/APR

Interest rates for loans are usually represented by APR or annual percentage rate.

APR’s are the interest rates represented over a 12 month period.

The FCA or Financial Conduct Authority, who regulate all things credit define APR as:

APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. The APR takes into account not just the interest on the loan but also other charges you have to pay, for example, any arrangement fee. All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender.

This is one reason why some interest rates for some loans, such as payday loan, seems so high.

Payday loans are short-term loans, usually 30 days or less, so when you express the interest rates over a 12 month period, they blow up to 1500% or 2000% or higher.

In looking at what determines the interest rate one may receive for a loan, we need to review these components:

Credit Score: Credit scores ar used not just to determine if a loan is approved or not, but also to determine what interest rate a borrower may receive.

The higher a borrower’s credit score is, the better or lower interest rate they may receive for a loan.

A lower credit score may mean a higher interest rate.

This is due to risk to the lender. A borrower with a low credit score is a higher risk in the eyes of a lender.

The Lender: The lender themselves can have an impact on what interest rate a borrower receives. Different banks and lenders have different interest rates.

Lenders also may tier their interest rates, a different interest rate for higher credit scores, and also tiered for the type of loan, loan amount, and the term of the loan.

Type of Loan: Different loans may have different interest rates. Just as a payday loan has a igh APR/interest rate, a mortgage or other secured loan will have a lower interest rate.

Secured loans historically have had lower interest rates as the loan is secured, and the lender has less risk of default on the loan.

Term of the Loan: The length of the loan, or term of the loan influences the interest rate as well.

Shorter loan terms for some loans, such as a 12 month loan, will have a lower interest rate as the lender gets their money back in a quicker time-frame.

Payday loans aside, because even though they are a short-term loan, they are a bad credit loan, and as such are a high risk loan to a lender.

Loan Amount: Some larger loans, such as mortgages, can receive a lower interest rate not just due to the fact they are secured, but a higher interest rate on large loans can make them unaffordable to the borrower.

As we can see, as a borrower we do not have control over many of the components that are used to determine the interest rate on a loan. However, we can control our credit scores, and by improving or raising them, we can receive a better, or lower interest rate.

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<strong>What is Our Criteria For Applying?</strong> 
Every lender on our website has their own specific criteria by the basics are mentioned below and you must have a guarantor to be eligible. Simply select the lender of your choice and you will be taken directly to their website where you can apply. You will be required to submit your details including:<li style=”text-align: center;” data-mce-style=”text-align: center;”>Name (must be over 18 as the borrow, 21 or 25 as the guarantor)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Residence (your chances will improve if your guarantor is a homeowner)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Employment status (must be employed or on a pension)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Income (earning at least £600 per month and able to make repayments)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Monthly expenses (not have too many loans open or in major debt)</li>
You will then be asked to include the details of your guarantor and as mentioned above, this is usually someone who you know and trust and wants to help you with your personal finances. Ideally, a guarantor with good credit will maximise your chances of being approved based on the idea of ‘if someone with good credit trusts you, well we can too.'<strong>How Much Can I Borrow From Guarantor Loans?</strong>Guarantor Loans gives applicants the chance to borrow £500 to £15,000 depending on the lender. Some lenders we feature like Buddy Loans only have a maximum loan value of £7,500 and TFS Loans is the only lender that stretches up to £15,000.Factors that can influence the amount you can borrow revolve around having a good guarantor. One that is a homeowner, with solid employment, income and good credit rating will maximise your chances of borrowing the largest drawdown possible.The lenders featured on Guarantor Loans see a homeowner as someone who has already gone through the rigorous process of credit checking and affordability and if they can afford a house, they should be able to act as a guarantor for you.By comparison, having a guarantor that is not a homeowner offers slightly less security and means that amount you can borrow is slightly less too.Higher amounts may be available to those who already have a better than average credit rating, are homeowners themselves and a repeat customer with the lender who has already paid their loan on time. To apply directly with your lender of choice see <a href=”” data-mce-href=””>direct lenders</a>.<strong>What Does The Guarantor Have To Do?</strong>Upon completing an application, the lender will typically send you a <a href=”” data-mce-href=””>pre-contract loan agreement</a> and SECCI (Standard European Consumer Credit Information form) which will highlight the terms of your loan. You and your guarantor will be required to review the terms of the loan, including the loan drawdown, fees, repayment dates and responsibilities – and this can be signed via an online verification process using your email and mobile phone.The lender will usually carry out an individual phone call with you and your guarantor to ensure that you both understand the responsibilities and what is required of you – notably that if you cannot make repayment, your guarantor will be required to pay on your behalf. Further to some additional credit and affordability checks, funds can typically be transferred within 24 to 48 hours (or sometimes on the same day).<strong>Are Guarantor Loans Available For Bad Credit Customers?</strong>Yes, even if you have a history of adverse credit, <a href=”” data-mce-href=””>CCJs</a>, bankruptcy or IVAs several years ago, you can still be eligible. The idea is that you are using your guarantor and their financial history to ‘back you up’ and give your loan extra security. However, it is noted that your guarantor should have a good credit score and consent to co-signing your loan agreement.<strong>How Soon Can I Receive Funds?</strong>Guarantor Loans works with lenders that can facilitate funds within 24 to 48 hours of approval, or sometimes on the same day.When your funds are successfully transferred, most lenders working with Guarantor Loans will send the full amount to the guarantor’s debit account first. This is a standard security measure carried out by lenders to ensure that the funds are going to the right person and confirms the involvement of the guarantor. The guarantor usually has a ‘two week cooling off period’ where they can decide to pass on the money to the main borrower or they can change their mind and return the funds with no extra charges.