There are three major factors that affect how much you pay for a loan.
Understanding these factors can save you time, money and frustration.
The Federal Reserve Discount Interest Rate. Banks
and other lending institutions borrow money from the Federal Reserve
Banks. The discount rate is the interest rate a Federal Reserve Bank
charges eligible financial institutions to borrow funds on a short-term
basis. This rate is set by the boards of directors of the Federal
Reserve Banks. The discount rate has a direct effect on the "Prime
Interest Rate", which is the interest rate on short-term loans that
banks charge their commercial customers with high credit ratings. You
can get live information on the current Prime Rate at www.FedPrimeRate.info.
Your FICO Score and Credit Report
There are companies that gather and sell information on where you work
and live, how you pay your bills, and whether you are sued, arrested,
or filed for bankruptcy. They are called Consumer Reporting Agencies
(CRAs). The most common type of CRA is the credit bureau. Potential
lenders will get your credit report from the credit bureau.
The FICO score is a method of determining the likelihood that
credit users will pay their bills. It condenses a borrowers credit
history into a single number.
You can protect your FICO score and credit report by paying
your bills on time and not over-extending yourself. You also have the
right to have false information removed from your credit report.
Lender Business Factors.
Banks and other lenders are in business to make a profit. They also
exist in a competitive market. Like all businesses, they will balance
their profit margin with competitive factors. If they charge too
little, based on your credit history and the prime rate, they risk
going out of business. If they charge to much, they risk losing you to
a competitor. Therefore, in order to get the best deal you can, you
should shop around.
Keep one thing in mind when you are shopping around. one of
the things that affects your FICO score is the number of times your
credit report has been accessed in a certain period of time. Therefore
allowing too many potential lenders to run your credit report in a
shirt period of time could be counter productive. Three or four is
typically a safe number. If you request an on line quote from several
lenders, they won't typically run your credit report until after they
have made their initial quote.
(You must explicitly provide a potential lender with
permission to run your credit report. For that, they usually need your
Social Security Number.)
In summary, the three major factors you pay for a loan are the
prime rate, your credit history (FICO score) and business conditions
such as competition. In order to get the best rate you can, you can do
two things, keep up a good credit history by paying your bills on time,
and shopping around for the best rate.
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