FinanceTeam

Why do Loan Interest Rates vary?

Interest rates on "personal loans" vary wildly, not just between different lending companies but also within the same company and for the same product. Take most high street banks and building societies at the moment. Their typical APR on a personal loan is quoted as between around 7% and 17%. And that's just the typical rate - which is a guideline indicating the rate at which 66% or more customers get their loan. The actual rates are likely to have an even wider range. Not only is the upfront information provided by banks somewhat confusing, it could be taken to be misleading - most of them only indicate clearly their typical APR on loans above £15,000 (because it's the lowest rate), while leaving you to look very hard on their websites for the rates applicable for smaller loans (because they are much higher).

Your risk rating governs the interest rate - normally

The normal reason for different interest rates being offered is due to risk. If the lender thinks that the risk of not getting their money back is higher, they will usually apply a higher rate of interest to offset the impact of some customers defaulting on their loans ie. not paying them back. They assess the risk of each potential customer using the information available to them; either provided by the customer or provided by means of a credit check. Typically they will look at your previous credit transactions and whether there have been any missed repayments, your address history, employment history, age, earnings, other debts etc. The less risky you look, the lower rate you will be offered. But as can be seen from the tactics outlined above, smaller loans cost more. Other factors that affect interest rates are of course the general economic climate, the flexibilty provided by the loan, upfront charges and early repayment penalties. It's not easy to factor all these things in when all you want is a quick personal loan, but you really should to get a clear indication of the cost of each loan deal.