What Factors Determine Interest Rates

Why does your creditor ask you to tell him your social security number and your income or employment proof? This is because your creditor wants to makes sure whether you will be able to return the money which you borrow from them. On the basis of your repayment capacity and the risk level your creditor charges the interest rates on the amount that you borrow.

There are several factors which determine the interest rates that the credit card companies and the banks apply to your credit card and the loans. Among them most important factor is your credit score. Your credit score is the gauge which the financial companies use to determine whether you will actually keep up with the finances and whether you will return them the money which they lend you. In fact your credit score reflects your creditworthiness.

Higher the credit score, higher are the chances for lower interest rates. This is because a good score means that you are disciplined enough in meeting your deadlines, you will repay them the amount timely and you will not ditch them once they lend you the money which you need to manage your financial requirements.

To cross check this, your social security number is the first thing which your lender asks you to tell them. Your social security number is the key which tells your creditor how you spend your money and how much you owe to others, what is your credit score and whether you have repaid your previous debts timely.
Other factors which influence the interest rates are your income, whether you are employed or unemployed and the collateral which you place for the amount that you borrow.

Your income determines your repayment capacity. Thus higher the repayment capacity lower is the risk of loss for the creditor and thus lower is the interest that you have to pay. The banks also lower the interest rates if you place collateral for the amount. This is because the collateral is a security which lowers their risk of loss and in case you default they have a security which they can sell to recover the amount that you borrow.

After your bank has analyzed your creditworthiness it will give you the interest that will apply to your amount that you borrow. Depending on your repayment capacity and your credit score it can be high or low. Now, it depends on you to either accept the rates and borrow the money at that rate or find out the interest rates from other banks as well.

Comparing the interest rates from different banks is a good idea to get the best deal and lower the interest rates which you pay on the amount that you need to fulfill your needs.