Most installment loan rates are determined using an index and a margin. An index is a base rate that is usually published and tracked regionally and is based on the overall economic conditions and the state of the market in which it is issued. The prime lending rate is one of the most popular indexes to use, and this is published regularly in the Wall Street Journal and can also be found in many online resources. The margin used to decide an installment loan rate is the number of percentage points the bank adds to the indexed rate. For instance, if the indexed rate is 5 percent and the margin is 1.75 percent, the rate offered would be 6.75 percent. The bank adds different amounts based on the type of loan and the rest of the loan terms.

Rate Fluctuation

Because most rates are based on indexed pricing and indexed pricing is based on overall market conditions and the state of the economy, rates will fluctuate on a regular basis. As demand for loans goes down, rates will also go down in an attempt to create better deals and entice consumers into applying for credit. When demand for loans is high, rates will be higher. These fluctuations are frequent and natural, and they provide opportunities to get an installment loan at a favorable rate if monitored properly. Watch the prime lending rate and explore the best options at your local lending institutions to find the loan that suits you best.

Locking Your Rate

During the application process for an installment loan, you will sometimes have the option of a rate lock. This means that if rates go up or down before your loan is finalized, you will still get the rate you locked in at. This can be either beneficial or detrimental depending on when you decide to lock in. If you lock your rate when rates are on the rise overall, it will be beneficial because you will get a lower-than-market rate when your loan closes. However, if you lock in and rates go down, you will still have to pay the higher rate. The loan officer will be able to help you decide when the best time to lock your rate is.

Annual Percentage Rate vs. Interest Rate

When you are quoted rates for an installment loan, two terms may be used; interest rate or annual percentage rate. While these may sound similar at first, they are actually two different numbers that are used for two different purposes. The interest rate on your installment loan is the rate at which interest accrues on an annual basis. For instance, if you have a $1,000 loan at a rate of 8 percent, after one year you will have paid $80 in interest. Your annual percentage rate reflects both the interest that will accrue annually and the fees or other costs associated with the loan, such as origination fees, processing fees and the like. The APR will be higher than the interest rate, but is a better depiction of what the loan will actually cost you. When comparing rates, it is best to compare the APR because it gives the most complete picture of the loan terms in one number.

Fixed vs. Variable

The final aspect of your rate is whether or not it is fixed or variable. A variable rate fluctuates with the market. However, most installment loan rates will be fixed, meaning that the interest you pay monthly will not change based on the index over the course of the loan. The lending website Loan.com states that this fixed rate can sometimes be a disadvantage due to the fact that you will continue to pay the same interest rate if market conditions cause rates to go down. However, the positive side of the fixed rate is that it will stay the same even if rates go up. Additionally, if rates drop significantly, you can always consider refinancing your fixed rate into a new loan with a lower rate.