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The Three Largest Factors In Your Interest Rate
There are three major factors that affect how much you pay for
a loan. Understanding these factors can save you time, money and
frustration.
1. 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.
Of the three major factors that affect your interest rate,
this is the one you have the least amount of control over.
2. Your FICO Score and Credit Report.
There are companies that gather and sell information about
information on where you work and live, how you pay your bills,
and whether you've been 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.
3. 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 too
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 short period of time could be counterproductive.
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.
About The Author
David Brumbaugh is the owner and operator of EZandFree.com, which
provides consumers with online tools for easily obtaining free
competitive Mortgage and Loan Quotes. It also serves as a
mechanism by which Mortgage Brokers can obtain legitimate
qualified leads from people who need their services.
Terms of Use
Copyright 2004 David E. Brumbaugh. All rights reserved. This
article may be published in your newsletter or web site. It must
be reproduced in its entirety including the biography and web
address.
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