Lenders charge borrowers interest. Paying interest is the cost of doing business, and borrowers cannot fight it.
You can, however, take a few steps to keep from being charged the highest interest rate. If you take the time to follow the simple tips below, you will be able to improve your chances of obtaining a loan with an interest rate that is advantageous. Even if you are currently in a financial situation where your credit score is not the best, you can take actions to improve your credit score and qualify for better loan rates. Let’s get started!
1. Take Time to Increase Your Credit Score
If you know that your credit score is medium or low, you may not want to make a large purchase right away. When lenders do a credit check and see late payments, mortgage defaults or a previous bankruptcy, they will consider you less creditworthy. If your credit score has been damaged by of any of those reasons, you will need to take time to increase you credit score so that they will not be charged a higher interest rate. You can do this by getting all your payments up to date and by reliably making payments on time, taking out a contract payment on a mobile phone or in-store finance, then paying it back in full and on time.
2. Remove Incorrect Negative Items from Your Credit Reports
One of the best things you can do is to obtain a copy of your credit report. You can request yours from Dun & Bradstreet. Check it thoroughly for any errors that need to be corrected. If these errors are negative, they can create an artificially low credit score, and you, the consumer, can dispute these errors and have them removed. The credit bureau will then recalculate their credit scores, and you should see an improvement in your credit rating thereafter. Now that you have tidied up your history, you can think about applying for a loan and obtaining a lower interest rate.
3. Shop Around for the Lowest Interest Rates
If it’s not possible to wait until your credit score has improved, shop around for the best interest rate. You have three different types of financial institutions to choose from that may offer very different terms. Banks, credit unions and other lenders all use their own criteria for setting interest rates. If you are simply looking for the lowest interest rates, get a no-obligation quote from these lenders. Loyalty isn’t going to help you here. It may well be the case that the bank you’ve always banked with are the ones with the highest interest rates.
4. Offer Collateral
An unsecured loan is much riskier for a lender. In this case, the lender will grant a loan to someone who does not offer anything as collateral that can be sold if the borrower stops making payments on the loan. Therefore, these types of loans require higher interest rates to cover the lender’s greater risk.
Secured loans are the alternative. As their name would suggest, their lower interest rates are based on the legal requirement that borrowers offer an asset as collateral. Home loan lenders will accept the house as collateral. Car owners can obtain a car loan with the car as collateral. As long as the asset meets the lender’s qualifications, you can offer it to qualify for lower interest rates. Take this as an example. Your bank may offer a minimum APR of 5.8% on an unsecured loan, but with something of value secured against it, they may lower the interest rate to 5%. Admittedly, 0.8% may not look like much, but if you are taking a loan out for a few years, it will save you quite a bit of money.
5. Add a Co-signer to the Loan
Lowering the lender’s risk of lending money is the key to receiving lower interest rates. If a lender views you as a risk, you can help by adding a co-signer to your application. If you defaults on the payments, the lender can go to the co-signer for payment of the loan. The fact that a co-signer is there to offer assistance in paying for the loan lowers the lender’s risk of lending money to someone who is a higher risk, and the interest rate will not be as high. A typical co-signee could be a parent.
6. Keep the Loan’s Term Length Short
By keeping your loan’s term length as short as possible, lenders are encouraged to lower their interest rates. If the length of the loan is very long, the interest rate can be higher. For example, lenders will charge a higher interest for a car loan that has a term of 64 months than they would for a loan that will only have a term length of two to three years.
This principle also applies to home loans. People have the choice of a 30-year or a 15-year loan, but the 15-year loan with the shorter term will also have a lower interest rate. Even a small difference in terms of the headline interest rate will save you a lot of money in interest because they will be paying interest for a shorter period of time, but it will also be at a lower rate.
A Professional Post from Clydesdale Bank
General Advice Warning
The Information on this page has not taken into account your financial situation, needs or objectives. Before acting upon any advice, you should consider whether it is appropriate for you.