Question:

Dear Steve,

At the advertised numbers, I would have consolidated.

What happened to the advertised rate?

Bill

Answer:

Dear Bill,

I’m not sure exactly what advertised numbers you are speaking about, and normally a question so short would not make it to the site to be answered, but you bring up a great teachable moment.

It doesn’t matter what any mailing piece or advertisement says about rates. An advertisement is an inducement to get someone to call. It is both bait and informational at the same time.

This is why you often see something like “rates as low as X%,” but almost nobody ever gets the advertised rate in reality.

It sounds to me like you acted as a smart consumer and noticed that whatever advertisement you saw wound up with a different rate, and you spotted that before you ever agreed to the offer.

There are very legitimate reasons rates will change.

The primary reason a legitimate lender might offer you a higher interest rate is that your risk level increased when they looked at your credit report, credit score, or income.

For example, take a look at the following table.

The lowest interest rate is 6.46%, but it goes all the way up to 17.74%. That’s just an example from one consolidation company. – Source

Before applying for any debt consolidation loan, I would recommend that you consider using a service like smartcredit to look at your three credit bureau reports and see what range your credit score is and what might be holding your credit score back.

This will give you some idea of improving your credit score to get the lowest rates available.

Not All Consolidation Loan Advertisements Are Equal

If you are looking at a debt consolidation loan offer from a company that does debt consolidation loans, that’s one thing.

But in recent years, some companies have appeared that send out offers that appear to be for a personal loan, only to attempt to sell the consumer a different financial product when they call.

So some might just be a scam.

Those kinds of transactions make me cringe. It is such a fine line between bait-and-switch and helping out with a different product when the first one is not available.

Honestly, only you can make that determination when that situation happens.

Interest Rates

I have a giant textbook that is only about interest rates. It is a complicated subject some people study.

The calculation of interest rates is something that brilliant people spend a lifetime doing with math I don’t understand.

If you have some time to kill, you might be interested in my section on the history of credit and debt.

The interest rate is determined by some factors, with your credit score being just one. Many other factors are included in determining the interest rate charged.

Interest Rates Are Determined By a Number of Factors

• Inflation.
• Gross Domestic Product.
• Cost of money to lend.
• The interest rate the lender can borrow, short-term or long term interest rates.
• Forecast of the economy.
• Competition by other similar lenders.
• Loan type (secured or unsecured).
• Length of the loan.
• Current and forecast future government policy.
• Borrower risk of default.
• Lender operating cost.
• Profit target.
• Demographic profile of borrower (age, occupation, etc.).
• Empoyment status (Self-employed, hourly,bonus pay,etc.).
• Size of the loan.
• Documentation available like bank statements, taxes, or other asset paperwork.
• Employment history.
• Recent credit inquiries.
• Education.
• Lenders desire to reduce risk or maximize return.
• The amount of volume a lender can generate. For example, a lender with higher loan volumes may be willing to make lessprofit per loan to undercut the competition.
• And many more factors.

If you want to learn even more, here is a good paper on the subject.

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