Many consumers might wonder how do lenders of payday installment loans decide what interest rate to charge? As with most businessmen, a payday installment loan lender is just a person trying to make money and so the interest rate they charge is determined by many factors including state and federal laws.
The interest rate for a payday installment loan is determined by many factors. Some of the factors include what price people will pay. Usually, if competition is tough, a lender may charge less than those of his competitors. Also if there are no borrowers looking for or applying for payday installment loans, than the lender may bring his interest rates down to attract more borrowers or have a low starting interest rate to attract more customers. Some less scrupulous lenders of payday installment loans may charge hidden fees that are not disclosed in the initial loan agreement.
The US Congress enacted a law called the Truth in Lending Act to have an equal way in measuring different loan offers. As per the law, every lender must give consumers a truth in lending statement. This document must include 4 key points of information:
1. Annual percentage rate (APR) which is the total effective cost of credit expressed as a yearly rate including fees and interest rate.
2. Finance Charge is the dollar amount of interest if the payday installment loan is paid over its full term.
3. Amount Financed is the amount of credit actually available for the borrower’s use or the net amount of credit extended.
4. Total Number of Payments is the number of payments to pay off the loan in full.
Based on these key points, this is how the interest rate of your payday installment loans is calculated. Some other factors considered by payday installment loan lenders in the decision of what interest rate to charge include what your credit score is and how you have paid on previous loans.
Usually, lenders can give low interest rates for those with high credit scores since they are considered less risky borrowers. The opposite applies for low credit scores. Moreover, making timely payments on your loans and other lines of credit and keeping your loan balances down are also effective ways that will increase your chances of getting an affordable payday installment loan.
There are basically five factors that most payday installment loan lenders use in deciding what interest rate to charge a borrower:
1. Character – This is answering the question “What kind of borrower will you be?” And the best clue to this question will be your personal credit history. Lenders always check to see how well you have managed your personal debt in the past. In case you don’t have a credit history, most lenders look for personal references, business experiences, and or your work history.
2. Credit Scores – Lenders can refer to credit-reporting agencies to look at your payment history. The 3 main credit reporting agencies are: Equifax Credit Information Services, Inc., (Equifax), Trans Union LLC (Trans Union), and Experian Information Solutions, Inc. (Experian)
3. Debt to income ratio – Most lenders calculate the interest rate they charge on your payday installment loan through your debt-to-income ratio. This is the percentage of your income that is goes toward your debts and this helps determine the ability of the borrower to repay the loan.
Therefore, the rate of interest that a lender can charge for a payday installment loan is dependent on some factors. So it is important that you do your homework to find the lender that can offer the best interest rate based on your financial situation.