Question

Alistair works at a local factory. He wants to purchase a car and approaches his bank for a loan. The bank offers him credit at a low interest rate. Which major factor will help the bank in determining the interest rate?

a. Alistair's credit rating
b. The factory’s balance sheet
c. The number of credit cards Alistair has
d. Alistair's social security number

Answer 1

a. Alistair's credit rating

The bank will primarily determine the interest rate of Alistair's loan based on his credit rating, which assesses his reliability in paying back previous loans and credit card debts. The interest rate reflects the bank's confidence in the borrower's ability to repay.

Step-by-step explanation:

The major factor that will help the bank in determining the interest rate for Alistair's car loan is a.

Alistair's credit rating. Banks assess the creditworthiness of borrowers by examining their past borrowing and repayment history, largely encapsulated in one's credit rating.

A credit rating is usually provided by private companies, which analyze borrowers' financial behaviors including their reliability in paying back loans and credit card debts.

Factors such as the number of credit cards Alistair has and his social security number are not direct determinants of the loan's interest rate.

Instead, the interest rate reflects the bank's confidence that the borrower will repay the loan, which is primarily influenced by the borrower’s credit rating. It's also worth noting that banks may consider savings and other investments, and might require additional measures like a cosigner or collateral in case a borrower has a lower credit rating.