What Factors Do Lenders Consider When Determining My Interest Rate?

What Factors Do Lenders Consider When Determining My Interest Rate? article image.

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When you are applying for a loan or credit card, of course you want to get the lowest interest rate possible—because that's what's going to save you the most money over time. But how do lenders determine your interest rate? Depending on the type of loan or product, lenders consider different factors, most of which include your credit score. Read on to find out what those factors are for mortgages, auto loans and credit cards.


For most people, a mortgage is the largest loan they will ever undertake—and that's why it's crucial to get the best rate possible. Even saving a fraction of a percent on your rate can save you thousands of dollars over the lifetime of the loan. Here's what mortgage lenders use to determine your interest rate:

1. Your credit scores

Most lenders look at credit scores when deciding whether you qualify for a loan, and mortgages are no exception. That's why it's important to review your scores and credit reports regularly to make sure you're doing everything you can to keep them as high as possible.

2. Your down payment

In some cases, the bigger the down payment you make, the lower the interest rate you'll qualify for. That's because mortgage lenders see you as less risky if you make a substantial down payment. Ideally, you'll put down 20% or more for the best rates.

3. Your loan term and loan size

If you can get a loan for a shorter period of time, you may be able to qualify for a lower interest rate. With a shorter-term loan, you'll likely have a higher monthly payment—but lower costs overall. The same goes for the size of the loan: If your loan is particularly large or small, you might be able to qualify for a lower interest rate.

4. Your loan type

Mortgage loans come in different categories: conventional, FHA, USDA and VA loans. The rates on these different types of loan products can vary significantly, which is why you should shop around and do your research on what you might qualify for.

5. Your home location

Where you're buying a property also factors into the interest rate. Simply put, some markets are more expensive than others.

Auto Loans

Auto lenders use the following factors to determine your interest rate:

1. Your credit scores

Your credit history plays a big factor in auto loans, as well. The higher your credit scores, the lower your interest rates on car loans.

2. Your down payment

Just like with mortgages, the more money you put down when buying a car, the more likely you are to qualify for a lower interest rate—because there's less risk to the lender.

3. Your loan term

Again, the shorter your loan period, the lower the interest rates you'll have access to.

4. Your car

The age of your car also plays a big role. New cars generally come with lower interest rates, while older cars carry higher rates because they hold a lower resale value.

Credit Cards

Credit card issuers use the following factors to determine your interest rate:

1. Your credit scores

Sensing a pattern here? Your credit scores and history are key to determining which cards you qualify for, and at which rates.

2. The type of card you get

You will generally pay higher interest rates on rewards cards that offer significant perks—because that's how they pay for those benefits. No-frills cards are likely to come with lower rates.

3. Your payment history

Most credit cards have a penalty rate—a higher interest rate issuers charge if you are late on your payments, regardless of your credit scores. That's another reason it's important to pay your bills on time.

Find the best credit cards in Experian CreditMatch.

How to Qualify for the Best Rates

The bottom line is that for all types of loans, you'll want to ensure that your credit reports and scores are in tiptop shape.

You can get a free credit report from Experian. There's no credit card needed to sign up, and you will have access to an updated report every 30 days. You are also entitled to a free report from each bureau once a year, which you can access at AnnualCreditReport.com.

When you check your reports, review them to make sure your identifying information is correct and the accounts are accurate. If you find an error, you can dispute it with the bureau directly. You can initiate a dispute online with Experian.

You can also check your credit scores through Experian, which makes it easy to understand your progress. You'll get information on your scores, along with explainers on why they stand where they do.

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