Factors That Determine Interest Rate

In a financial institution, there are many important aspects to consider. One of these many aspects is the interest rate. To obtain financial stability, a financial institution needs a steady flow of money which they get from their interest rate.

Another example of the factors that determine the interest rates is the evaluation of the lender’s own team of management specialists. Another factor that determines interest rates is the credits of the company.

Also, one of the factors that determine interest rate is the strength of the borrower in terms of his credits.

Capital is what a bank uses to power up its investments. It usually has a lower rate than the money they are lending out. To determine the bank’s overall rate of interest, they use a base rate. From deposits up to loans, they use a common base rate like the Treasury bill rates.

By adding a little spread to the rate, they can calculate the basis point for their interest rate. An equivalent of .01 % is for every single basis point, so to complete one percent, there must be one hundred basis points. Once they calculate their base rate, it is time to break it down to their product level.

Lending companies and banks offer a lot of varieties in their products from deposit and to their lending ones. Such kinds of these products can be one of the factors that determine the interest rate. Lending companies and banks usually have a team of loan committees that determine their rates.

Certain factors that determine interest rate are competition, the industry of housing market and of course, the base rates of the bank or the lending company itself.

As long as there is competition, the rates are more likely to drop. A standard that many banks compare the activity of their rate is the Wall Street Journal Prime. If the prime goes higher, so is the rate. This is also the scenario if the prime goes down.

The worthiness of credit and the performance of the client also play a vital role in determining the interest rate. Clients that have a history of poor credit especially in an institution where they apply for a new loan may find the approval of their credit subjected to a much higher rate of interest.

In certain products of most banks, an initial rate or promo is offered. Such rates are designed to draw the borrower’s attention in a short term contract at very low rates. When the initial rate period expired, the rate will go up.

Usually, a bank includes language in their contracts that binds the borrower in a given time after the expiration of the promo or initial rate. Another situation is when a borrower finds his rate changing after failing to complete his payment. Sometimes, prior to closing, mortgages are considered.

Another factor that determines the interest rates is the lenders having the authority to negotiate their rates for a certain reason. By knowing these factors, you will get an idea of the interest rates offered by banks and lenders if you are planning to apply for a loan.