Loans often become necessary in consumer(s) and organization(s) bid to fund financial deficits.
Taking a loan may turn out to be a smart financial decision. However, you need to ensure that the interest rate on the loan you choose to take is low (I’d prefer to say “cost-efficient) repaying will be convenient. But, fortunately, there are several ways to reduce the interest on your loan.
So, if you are looking for tips on how to reduce the interest rate on your loan, here is what you need to know. Let’s take a dive in! But, first, we will need to understand how interest rates work.
How do interest rates work?
Interest rates are directly proportional to the amount of risk associated with the borrower. Interest is charged as compensation for the loss caused to the asset due to use. In the case of lending money, the lender could have invested the money in some other venture instead of giving it as a loan. In the case of lending assets, the lender could’ve generated income by making use of the asset himself. Thus, in return for these lost opportunities, interest rates are applied as compensation.
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The annual interest rate refers to the rate that is applied over a period of one year. Interest rates can be applied over different periods, such as monthly, quarterly, or bi-annually. However, in most cases, interest rates are annualized.
Well, that is how far we can go… you can find a very detailed, expert analysis on loans here (you can thank me later! of course. Now, if you have been asking,
How Can I Reduce The Interest On My Loans?
Here are some good ways to reduce the interest rate on your loan:
- Improve your credit score
- Understand the Market
- Have a Great Negotiation With Lenders
- Ensure to avoid late payments or defaults at all costs
- Consider a balance transfer credit card
- Compare rates online
- Understand the credit card company’s perspective
1. Improve your credit score
The credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual.
It is usually a 3-digit number, ranging from 300 to 850 (using the VantageScoring model), indicating the risk level associated with granting credit or loan to a prospective borrower or customer. It is often important to know your credit score for important loan decision-making.
Your credit history is the most important factor that determines the interest rate of your loan. Basically, the higher your credit score, the lower your interest rate. To improve your credit score, you need to start by paying off pending past debts.
Also, you need to reduce the amount you presently owe. If you know that you will obtain a loan in the future, it’s important to work on enhancing your credit score. Customers who have a high credit score are eligible for a higher loan amount and get a lower interest rate. Basically, this is because lenders consider them creditworthy.
The lower it is, the higher the risk and shows that there is a high chance that the customer may default on payment and vice versa. The scores are ranked as excellent, good, average or poor. Thus, we can simply explain it to be a numerical index of a borrower’s creditworthiness.
A credit score is primarily based on a credit report, information typically sourced from credit bureaus.
2. Understand the Market
Assess your credit health before making any big ask of a lender. Typically, a higher credit score equates to lower interest rates. Likewise, income may be taken into consideration when determining your interest rate. Because those with lower income and lower credit scores are seen as higher-risk borrowers, card issuers and other lenders will be less inclined to offer deals—in fact, for many low-income, low-credit applicants even just opening an unsecured credit account with many issuers can be difficult if not impossible.
Ensure your credit report is accurate and up-to-date. Ensure that you haven’t missed any payments within the last twelve months—a history of late repayment may make lenders less inclined to give you an adjusted rate. You’ll also want to ensure you pay down any outstanding debt as much as you can before contacting your lender. Try to shoot for less than 30% of your total credit limit outstanding (also known as your utilization rate).
Even if your credit isn’t excellent, there may still be hope. If your score has recently increased, or your income has grown, you may be in a good position to renegotiate. Conversely, if you’ve suddenly experienced a financial hardship—like an unexpected medical illness or unemployment—you may also be able to get an adjusted rate. Card issuers often advertise understanding in the face of crisis.
Next, identify the rate or rates you’re currently paying. If you have multiple cards, you’ll have to do this for each one. Search your credit statement for “Annual Percentage Rate” (APR). This number reflects a factor of the amount you pay on your outstanding debt each billing cycle. To learn more about APR, read our extensive guide.
It’s also a good idea to ensure you fully understand your own financial position. During any negotiation for a better interest rate, gathering information about your normal income, expenses, total assets and liabilities can help you see yourself the way a potential lender will, which in turn can help you improve your position and become a better candidate for a rate improvement.
Also, do some research to understand the market. Check competitor credit cards and see what kind of deals they offer. If you discover a rival company offers a better rate than you currently receive, you may be able to leverage this information when negotiating—even if you don’t want to switch lenders. Other companies pre-approving you for better rates may also be a likely indicator that your credit standing has improved.
3. Have a Great Negotiation With Lenders
Loans are negotiable, and you can choose to negotiate the loan interest rates with your lender if you have good standing with them. Also, you can choose to do this if you and your lender have an existing relationship. It is possible that sometimes if you negotiate and have a steady source of income, you might get loans at a highly competitive rate. This saves you a whole lot of money.
4. Ensure to avoid late payments or defaults at all costs
It is important to track your loans and pay them off at the right time. One common mistake that borrowers make is late payments or even defaulting on loans. This makes the lender levy a late payment fee, hence, making you pay above the original interest rate. Also, this can negatively affect your credit score, which ultimately affects your rates on any loan you will take in the future.
Therefore, even if your lender does not give you a notice regarding the loan due date, you have to keep track of the payments. Any default or delay will lead to an increase, not only in the loan interest rate but that of subsequent loans, as the risk for the lender becomes higher.
5. Consider a balance transfer credit card
This may allow you to consolidate your existing balances from multiple cards onto a single, new card.
For credit cardholders facing carried balances with high-interest rates, a balance transfer card option may help reduce a rate or, with the right account, provide a few months of reprieve from interest altogether. Balance transfer cards may provide you with an alternative for getting a lower interest rate on your current credit card debt.
A balance transfer moves a balance to a new card—ideally with a lower interest rate. There is often a balance transfer fee from a new card issuer, but many issuers offer 0% introductory APRs on balance transfers for a few months to attract customers trying to dig themselves out of debt.
You’ll want to use a credit card with a 0% introductory annual percentage rate, or APR, offer for balance transfers to save money on your debt repayment. Here are some cards to consider.
6. Compare rates online
It is very easy to check the loan rates that are offered online. All you have to do is search for different online lenders, compare their loan interest rates and pick the lowest and best suited for you. Numerous online portals can give you a brief review of lenders and their interest rates. Hence, all you need to do is to research and make sure you get the lowest rate on your loan.
7. Understand the credit card company’s perspective
You can better negotiate if you understand what the bank or credit card company needs to see on its end to agree to your request. Sometimes a bank would need to ensure customers were at lower risk before agreeing to drop the interest rate.
Summary
Learning how to reduce your loan interest rates, you must learn to make smart financial decisions. Fortunately, several tips can guide you to make better financial decisions.
If you maintain good credit and a clean payment history you can often be granted a lower interest rate. Even if you don’t, don’t give up. Continue to make payments on time, reduce outstanding debt and make a plan to try again in three to six months. Improving your credit health will help you make your case next time.
However, the most important factor you need to work on is your credit score since it largely determines how much you borrow and your rates. So start today!