What Is a Good Loan Interest Rate?

Interest on a loan is paid for the privilege of borrowing money from a lender, whether from a major financial company or a close friend. Getting a good interest rate depends on how much the loan is for, the purpose of the loan, down payment and how long it will take to repay the loan. Those with high credit scores are usually offered the best rates by lenders because of their excellent history as borrowers. In essence, the lower the interest rate, the less money you will pay out-of-pocket in addition to the principal.

Types

What qualifies as a "good" interest rate depends on the type of loan you are seeking. There are mortgage loans, home equity loans, new and used car loans, and personal loans. The interest rates for each product differ.

Time Frame

Historically, the longer the period of time given to pay back a loan, the higher the interest rate will be. This is because it takes a longer time to repay the principal. Better interest rates can be found on loans that feature shorter repayment time periods.

Effects

A good interest rate on a loan is a result of having excellent credit history. This indicates that you can be relied upon to make timely payments without missing any, and that you know how to handle your lines of credit. The lower the interest rate, the less your monthly cost will be during the repayment period.

Considerations

Interest rates are based on the base rates set by the government and commercial lenders. The state of the economy in areas such as real estate, retail and employment are weighed by the Federal Reserve Committee when they meet to set the Federal Funds Rate. This rate is used as a starting point by financial institutions when determining interest rates for borrowers and eventually affects what kind of interest rate you as a consumer can get on a loan.

History

What defines a "good" interest rate also depends on the shape of the economy at the time you're seeking a loan. For instance, in the 1970s, interest rates on a 30-year fixed mortgage began around 8 percent, peaking at almost 19 percent in 1982. Rates declined throughout the rest of the decade and into the 1990s, when the average was about 9 percent, and as of 2009, were at historic lows hovering around 5 percent.