Credit score differs from person to person based on past financial decisions. Some have a credit score as high as above 700 while some may have lower credit scores as low as below 300. So, do all get loans at the same rate of interest? Not really. Credit scores indicate your past borrowing and repayment habits. A high credit score of an individual means that he has repaid all the installments on time whereas a lower credit score means that there are defaults, bankruptcy or foreclosure in the past.
Lenders ascertain the risk associated with each borrower with credit scores and then deploy the method of risk-based pricing of loans to determine the rate of interest to be charged. The Prime Lending Rate (PLR) is determined by the federal bank and lenders can't lend money below that rate to borrowers. People with higher credit scores are charged a prime lending rate and interest rates gets higher than the PLR as credit scores get lower. So, if the PLR is 6% then an individual with a credit score of 700 would be charged 6% or 6.25%. However, if the credit score is 500 the same lender will charge 8% or even higher.
The duration of the loan and other charges also varies with credit score. People with higher scores get loans for longer duration and the processing fee may also be waived.
How to find low interest deals against risk-based pricing of loans
The risk-perception for a particular loan applicant varies from lender to lender. Big lenders can even reject applications of borrowers with a credit score of 650 whereas a new entrant in the lending business can take the extra risk and may approve the loan of a person with a score of 400. And that's exactly why it is advisable to shop around for your loan. Get quotes from as many lenders as possible and negotiate with them to lower the interest rates. Compare various loan products offered by lenders using a loan comparison site. And, if you can, delay applying for a loan and increase your credit score in the mean time. You can repay some of the small debts or clear your credit card bills to increase your credit score.
There is stiff competition among lenders to acquire borrowers. Take advantage of risk-based pricing of loans and get good deals on your loans.