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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.
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David Brumbaugh is the owner and operator of
EZandFree.com.
EZandFree.com 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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