As most people know, the interest rate is the biggest cost you will have to bear when you borrow money. It is with this fee that the banks make their money by offering loans and they all compete to lend their money at the best possible interest rate and at the same time make as much money as possible to their customers.
This is a very difficult balancing act for the banks and for those who take the time to compare the best possible interest rates, there are sought after savings to save.
How is the interest rate set?
When banks and other lenders set their interest rates, a number of different factors are taken into account and these factors also differ in part between different companies. Sometimes these different factors include, for example, the type of loan you as a customer are interested in. The interest rate for a longer loan, such as a mortgage loan, is usually lower because you will pay a certain interest rate over a longer period of time. The bank is therefore guaranteed an income from you as a customer during this time and can therefore offer you a lower monthly cost.
If, on the other hand, it is a shorter loan, or a so-called quick loan, then you expect that the interest rate will be at a significantly higher level. This is partly because the bank has a much shorter time to make money by offering you its services. But it is also because in most cases the requirements for taking such a loan are significantly lower and in this case the bank takes a higher risk by lending its money.
Another important factor is what your own finances look like today and how your financial history looks. If you have a good financial base, the bank will see you as a customer where they take a low risk by offering a loan and you may therefore be offered a much lower interest rate than other customers. This is because the bank sees it as very likely that you will be able to repay your loan amount in full and that you will be able to do it on time. However, if you have a payment note in the baggage, there are few who will want to offer you a loan and those who are likely to do so will therefore be able to charge a heavy interest rate because you consider a risky customer and your own opportunities to choose a of their competitors is extremely limited.
Rules for interest rates
Contrary to what many believe, there are actually no rules for what interest rates different companies can offer. Each operator is completely free to offer the interest rate that feels most reasonable for them, and it is then up to you as the customer to decide for yourself what suits you.
On the other hand, there is the law that every lender is obliged to report the effective interest rate that is available for the loan they offer. With this information, you as a consumer can read exactly what the total cost of your loan will be and thus be able to make an informed decision regarding your loan. A good tip is therefore to always locate the effective interest rate in the jungle of loan offers and then choose the best condition for you.
Find the best interest rate
Obtaining the lowest possible interest rate on their loan is of course the goal for all borrowers, but depending on your current financial situation, it can be difficult to compete for the best rates on the market. In order to get a head start among the banks, there is the opportunity to set up a security yourself.
This means that you put something of great financial value that you own as collateral with the bank. For example, it could be a house, apartment or car that you own and which the bank takes as a form of insurance to keep in case you would not be able to repay the amount you have borrowed.
Not only does this increase your chances of being granted a loan, it also often leads to a significant reduction in your effective interest rate. However, it should be added that this is a risky strategy in the goal of reaching the lowest possible interest rate and that in many cases it may be better to pay the interest rate offered.
That a loan entails a certain interest rate is something that is inevitable, but there are certain ways to pay a lower interest rate than one might initially think, and it always pays to compare different banks and their different terms.