The Prime Rate

• The Federal Reserve sets a target interest rate for interbank transfers based on monetary policy to influence lending and spending in the economy. This target, known as the Federal Funds Target Rate, influences the prime rate. The prime rate is the prevailing rate at which banks make short-term loans to each other on a daily basis.
  
  Banks generally determine interest rates for consumer and business loans by adding a certain percentage to the prime rate. Since the prime rate can vary frequently, the prevailing rates offered to borrowers can vary as well. Changes in the prime rate are the main reason for shifts in variable interest rates, as well.
  
  

Financial Information

• Lenders take an in-depth look at potential borrowers' financial situation before making a lending decision. Lenders will look at your financial history, including your rental history, bankruptcies, defaults and records of previous loans made to you by the institution. Banks will also look into your current financial situation by analyzing your income statement and balance sheet. For individual borrowers, banks will analyze your income and expenses.
  
  If you are very financially stable and responsible, consider approaching your personal bank first for a loan. They will have detailed internal records of your financial stability.
  
  

Credit Score

• Looking at a borrower's credit rating provides less precise information than financial history, but credit ratings play an important role in lenders' interest rate decisions. Credit ratings can be damaged quickly, but they can recover much more slowly. Protect your credit rating by making payments on time to all creditors and limiting the number of open credit accounts you have.
  
  

Type of Loan

• The type of loan that you are looking for can also influence the type of interest rate you can obtain. Generally speaking, unsecured loans carry higher interest rates than secured loans due to the added risk to the lender. Longer-term loans generally carry lower interest rates than short-term loans, since the lender will be earning money for a longer period of time and accruing a higher total amount of interest even with lower rates. Revolving credit accounts generally carry higher interest rates than one-time installment loans, as well, since lenders are offering more of an ongoing service with a revolving loan.