Woman hand using mobile phone and showing dollar signs. Concept: credit score and interest rate.
Suzanne Llanera
By: suzanne_llanera
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Credit Score And Interest Rate: How Are They Related?

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Any kind of business loan, big or small, comes with an interest. It’s the price you pay. And, as a business owner who takes out a loan or may decide to take one in the near future, the big question is: how do you bring this interest rate down?

One of the most effective ways is to work on your credit score to simply increase it as much as possible. After all, the working principle in the lending industry  is … the higher the credit score, the lower the interest rate. But how are credit score and interest rate actually correlated? What interest rate could you expect with your current credit score? To find out, just keep on reading.

How Does Your Credit Score Affect Your Loan Interest Rate?  

Below you have set of ballpark figures indicating the interest rate you could pay based on your credit score.

(Source :  https://www.myfico.com/credit-education/calculator/loan-savings-calculator/)     

Word of caution: Be mindful these are mere figurative, since there are many other factors that influence your interest rate (as we’ll see in a section below). The truth is that there is not a “magic formula” that calculates the precise correlation between credit score and interest rate. Your actual and true interest rate will ultimately be determined by the bank or the lending institution after having processed your loan application. By then, you could expect your interest rate to be either lower or higher than the figures laid out here.

Read here how to determine if a business loan interest rate is fair

So the best advice to get the lowest interest rate possible is to stay on top all all the aspects of your finances, not just your credit score.

But now let’s check an example that shows the correlation between credit score and interest rate (from MyFico.com): on a 30 year fixed rate mortgage, for a person enjoying a credit score between 760-850, the annual percentage rate (as a national average) is 3.77%. For somebody with a credit score ranging from 620-639, the national average of the annual percentage rate is 5.36%. Again you need to note this is a case of long term mortgage and not your traditional small business loan, so there’s bound to be variances.

What Other Factors Impact Your Interest Rate?

As we have mentioned, your credit score is only one of the factors that will determine your interest rate. Financial institutions and loan providers are averse to risks, especially high risks. So before they sign the dotted line on the loan approval, they take into consideration other factors:

  • The value of any collateral you’re be bringing to the table  
  • The amount outstanding on your existing loans, or any debts you are currently paying
  • The loan amount that you have requested
  • The purpose you have for the loan
  • Your financial statements
  • The length of the loan
  • The cash flows of your business

Some Final Thoughts

To summarize, your credit score will be essentially the key determinant of your interest rate when applying for a loan (but not the only one!). Remember the operative principle … the higher the credit score, the lower the interest rate. And even if there are other factors that could come into play in determining your interest rate, having a good if not great credit score will always greatly be to your benefit.

If your  business is expanding operations and appears to be begging for some definitive decision and action, and particularly if your current credit score is solid, NOW it could be the right time to check out the business loans available at Camino Financial. Try them today. They’d be glad to touch base with you and lend a hand to prop up your business or to know more about credit score and interest rate. When you apply for a Camino Financial loan, they’ll do a soft pull of your credit that won’t compromise your credit score in any way.

 

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