What Defines Your Interest Rates?

While we’ve done a brief post about what defines interest rates in the past – this time we’d like to go into a bit more detail.

If you’re looking for finance in the mid, short, or long term – knowing what makes your interest cheaper or heftier, can help you be better prepared for it, and get you on track for better payment terms.

While the overall state of the economy interferes with your interest rates – here, we’ll stick mostly to factors that are directly or indirectly in your control.

So you can get tangible actionables out of them.

So let’s get to it.

Property Ownership

For a second, put yourself in the lender’s shoes.

Whenever they’re lending money – all they want to know is how likely are they to get their capital back.

Whenever you own a house, for example, the lenders will instantly see you as a more reliable borrower, as your property can serve as collateral and reduce significantly their risk.

With that guarantee by itself being a leverage to negotiate better interest rates.

While owning property doesn’t ‘paint’ the whole picture of how financially stable you are – as a rule of thumb, without property, the higher the perceived risk of the loan.

Repayment History

Whenever you apply for a loan – lenders access your past loans and credit repayment history to check your financial reliability as a borrower.

If you pay your loans on time, lenders will assume this behaviour will be maintained throughout their loan to you.

And as before, safer equals lower rates.

The fewer the ‘red flags’, the fewer lenders will tend to protect themselves with high-interest rates.

Therefore, if you’re looking to secure future loans at the best interest rate possible, make sure to maintain a strong payment history today.

Credit Score History

Even if you’re looking to borrow for your business – your credit score is a vital component in the process.

A summary of your creditworthiness history, your credit score gives lenders a quick and objective measure of how financially reliable you are.

In consequence, following the same logic as the previous two factors, the higher your score, the lower the risk – and the lower the rates.

Our pro tip is to constantly keep an eye on, monitor and improve your credit score, as it’s essential for favourable financing terms.

Time in Business

Often businesses that have been in the market for a long time are seen as well-established and lower-risk investments.

Which by that same logic, leads to lower interest rates.

New businesses without a proven history are typically considered higher risk – therefore being subject to higher rates.

If you can manage to demonstrate a sustained and successful business operation, its history can be integral to securing better financial terms.

Your Business’ Financial Health

While most of our lenders (on a regular low-doc loan) won’t ask for much financial information apart from your business’ income, some will scrutinise your business’ financials more thoroughly.

It’s always helpful to be mindful of the health of your balance sheets, cash flow statements, and profit and loss statements – as these indicators will be used to define your financial reliability.

A financially healthy business with strong revenue streams and manageable debts is far more likely to secure lower interest rates.

Therefore, maintaining robust financial health is crucial not only for the day-to-day operations of your business but also for accessing cost-effective financing options.