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There are a number of factors used by lenders that go into pricing the interest rates on a loan. These factors can broadly be broken down into two categories:

• The product you are seeking
• Your credit rating

In many cases
it is the nature of the credit you are seeking that will determining to a large extent the cost of that credit. Unsecured credit is more expensive than secured credit. This is because the risk taken on by the lender with unsecured credit is greater. If you can provide your home or other property as security against the loan
then you are virtually guaranteeing to the lender that there will be sufficient funds to repay the loan. In exchange for this added security
the lender will be willing to offer you far lower interest rates.

The ‘Gamble’

The gamble
which the title suggests
is the fact that you are using the one financial possession that is most precious to you
your home. If you land in financial trouble and default on your loan repayments then your family home is at risk; you could consider it a gamble because almost anything in life is possible.

The Flexible Loan

Another factor that comes under this category is flexibility when it comes to various types of loans.

A credit card is far more flexible than a personal loan. With a credit card you can really decide to borrow as much or as little as you like
within your credit limit. You can repay a minimal amount each month
or the entire balance
or anything in between. The lender is really making a certain amount of credit available to you and you have free rein to use it as you wish.

Personal loans on the other hand are for a fixed amount
over a fixed period and the monthly repayments you have to make will be fixed. This offers far less flexibility to you
but the lender will compensate by giving you lower interest rates.

Factor In Your Credit Rating

At the same time
regardless of which type of credit you are seeking
lenders will go on to take your credit rating into account before giving you a final price for the credit. If your credit rating is very poor
the lender may decide not to make a loan to you at all
or advise you to seek a different type of product
so for example
unsecured lending may not be available to you if you have bad credit
while a secured loan will be.

Determining Your Credit Rating

Your credit rating will be determined by your previous repayment habits. So if you have failed to repay debts on time
have had court judgements made against you
or if you are unemployed or just started a new job
lenders will not be confident that you will meet all of your repayments in full
and on time
and if they do decide to lend to you
they will compensate for the higher risk by charging more interest on the loan.

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