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Why companies with higher credit rating will offer lower interest rates?

Interest rate has a direct consequence on money lending. Loans and credits of lower interest are quite easier to refund therefore these types of loans are highly wanted.

Companies with higher credit rating will offer lower interest rates?

Credit rating is a very powerful factor than can affect one’s life and even the future. When an entity requests for a loan or credit, the credit rating of such entity is firstly considered before they can get the loans. A credit rating is a type of assessment that denotes the worthiness of an individual or firm to assess credits. It may be on a general aspect or in terms of a particular loan. It also assesses a borrower’s credit risk. Sometimes, it may be affected by the responsiveness of a borrower to repay their loans and a borrower’s current debt.

Every individual, firm, organization or government has its own credit rating. Standard & Poor’s (S&P), Moody’s, and Fitch are popular examples of credit assessment agencies. However, these assessment agencies are paid by the individuals needing a credit assessment for itself or for one of its debt issues.

READ: Check CIBIL score by PAN card for free

These agencies denote an individual’s credit rating with various designation, may be letters such as A, B, C or more, numbers or a combination of both. For instance, S&P uses AAA and BB ratings designations.

Benefits of Credit rating

Most lenders consider this as an important criterion because it indicates the likelihood that a borrower will repay on time or even repay at all. It also determines the interest rate at which the loan will need to be repaid. A higher credit rating signifies that the borrower had paid their previous loans and credits promptly and without issues while a lower credit rating means that the borrower might have had issues repaying back their loans or credits in the past. At the same time, a lower credit rating might affect a borrower’s chances of borrowing in the future.

cibil score

Therefore, it is expedient that an individual maintains a good credit rating to avoid borrowing issues in the future. However, newcomers (i.e. individuals and companies without any past history of credit and loans) may have a lower credit rating due to lack of knowledge about their debt profile or credit handling.

Interest rates based on Credit rating

Interest rate has a direct consequence on money lending. Loans and credits of lower interest are quite easier to refund therefore these types of loans are highly wanted. Most financial institutions or lending agencies might advertise an average rate but, actually, the rates are determined by the borrower’s credit rating. Sometimes, some agencies also may also increase interest rates to discourage a borrower. Most companies will tend to play smarter, getting on the good books of most credit assessment agencies by repaying their loans and credits on time. However, some unexpected circumstances might spring up.

It is worthy of note that, there are some other factors that can affect the interest rate. Some uncontrollable factors such as inflation (aggregate increase in price of goods and services), demand and supply rates can affect a borrower’s credit rating. Other factors include duration of loan, amount of loan, type of loan, borrower’s reputation and guarantee, which are directly influenced by the borrowers themselves.

Ques/Ans related to credit rating & interest rates

Qn:1) Do people with lower credit score pay higher interest rates?

Ans: Yes, sometimes it is applicable but it is not universal. Some of finance companies have strict rules that as your credit rating goes down proportional their interest rate will goes high. And they made different slabs for different credit rating peoples. Carmax finance is one of the example for this.

Qn:2) Does lowering your interest rates affect your credit rating?

Ans: Not at all, because there is no relation between paying interest amount or rate on credit rating. Your credit rating will directly depends upon your past loans and finances and how well you paid your loans on time.

Qn:3) What should I do with a high credit score?

Ans: There are a number of benefits if you are having a high credit score, normally people have 750+ points are considered as good credit score. You can definitely get any kind of loan with less hassle and also in less interest rates as compared to people with bad credit score. And the paper work will be going to less because you need to give less security documents due to having high credit score.

Qn:4) Is 789 a good credit score?

Ans: Credit score or CIBIL score are counted from 300 to 900. And in between 789 is on higher side and comes with lots of benefits. With this credit score, you can get all most all kind of loans with adequate security and paper work. Also after reaching to 789, is it very easy to touch 800 credit score and that will be a best touch for your credit rating.

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Vinod Kumar

Vinod Kumar is Human Resources & Management or HR Manager in a renowned car manufacture company and deals all kinds of disputes under PF, ESIC and other benefits for employees. And holds the management command in his hands.

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