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What determines the interest rate?



The vast majority of us are not interested in paying more than is strictly necessary for a loan.

Therefore, before starting to send loan applications to all existing credit institutions in the market, it is a good idea to know the details of each of the options they offer and to know what can be done to obtain the best loan. for your situation and with a reasonable interest rate.

The interest rate generally plays an important role in the evaluation and selection of an online loan, because of course, it helps to calculate how much the loan will cost you.

Next, we can see what factors affect the configuration of the interest rate.

Below, you can consult our guide where we show you other important factors that determine the final interest rate.

What is the interest rate?

What is the interest rate?

The interest rate consists of the relationship between the money that is worth an operation or service and the initial amount of it, that is, the money provided. It is usually expressed in a percentage and is paid monthly.

Remember that the percentage of the interest rate does not have to be the final amount that ends up paying for a loan. This is because the nominal interest rate (TIN) does not include the different additional fees, as it does with the APR.

Nowadays, online financial institutions offer different financial products such as online credits at the moment with interest rates to their consumers depending on several factors, including the purpose of the loan. In this way, you can calculate and compare the interest rates offered for your situation and specific needs.

However, it should not be forgotten that the borrowing entities will determine the interest rate of your loan based on economic factors, such as a personal evaluation to determine your economic capacity.

In addition to this, there are more factors that determine the interest rate of your loan. That is why we want to help you understand it more simply and visually: with an infographic.

What determines the interest rate?

What determines the interest rate?

Credit evaluation plays a crucial role in determining the interest rate. In fact, if your credit rating is positive, you will get a low interest rate, thus paying less for the loan.

This is due to the lower risk of default that the entity assumes: if you have a good economic situation, you are more likely to be able to pay your loan.

But as we mentioned, there are other factors that determine your interest rate, such as the duration or amount of the loan.

What is the difference between a fixed interest rate or a variable?

What is the difference between a fixed interest rate or a variable?

When we talk about bank interest rates related to loans, there are two types: the fixed and variable interest rates.

If you choose a loan with a fixed interest rate, the rate of the immediate response online credits will be established before the payment of the first installment. With this, you know that the interest rate will remain fixed until the termination of the contract, providing some peace of mind when obtaining the loan.

On the contrary, if a variable interest rate is chosen, it means that it may be subject to changes and variations depending on the current situation of the financial market . In this way, you never know if the rate will fall, remain stable or increase during the loan repayment term.

How to get a low interest rate?

How to get a low interest rate?

Now that you know what factors determine your interest rate, you can consider whether there are possibilities to improve your financial situation before submitting your loan application.

For example, if you have any invoice pending payment or other unresolved financial issues, it is better to solve them first to have a little more economic stability.

On the other hand, you can consider the duration of your loan, with the aim of obtaining a lower interest rate over a shorter period of time.

Remember that whatever interest rate you are offered, you are not required to accept it .

You will only be linked to the loan once you have signed the contract, so you can even request a loan from several entities to determine, contract in hand, which of them is worth more. After that, you can accept one of the offers and refuse the rest.

Therefore, we recommend investigating and comparing the different offers that exist in the credit market, thus increasing the possibility of finding a lower interest rate for your loan.

What factors influence the interest rate?

What factors influence the interest rate?

As we have already mentioned and you will know, the interest rate in Spain depends on the market and the law of supply and demand. The lower the interest rate, the greater the demand for financial products and vice versa, the higher the interest rate, the lower the demand for financial products.

If we talk about the offer, you will see that the relationship is direct, that is, at a higher interest rate there will be more predisposition to offer money and, at lower interest rates, less money will be offered.

The essential thing is to obtain a balance between the two variables to establish the value of the interest rate.

In addition to the market, there are different variables that are directly related to the interest rate, and are the following:

  • The expected inflation
  • The real interest rate the public debt has
  • The liquidity and credit risk premium of the issuer

Bank interest rates

Bank interest rates

If we talk about bank interest rates, we have the following:

  • Active interest rate: % that banks charge for credit products and services, taking into account the provisions of the central bank and the market.
  • Passive interest rate: % that banks pay to whom they deposit the money.
  • Preferential interest rate: % lower than the general fee charged to financial products intended to be promoted either by a financial institution or by the Government.

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