When applying for a loan, the interest rate is something you should consider in detail. This item has the most impact on the overall cost of borrowing money, as lenders determine it independently, based on the market and current global APR.
Lenders have diverse loan offers for different types of borrowers and their needs. What makes a huge difference is the loan type and the interest on this financial arrangement, which isn’t the same for top-tier borrowers and those whose credit rating is average or below.
Lenders usually advertise competitive rates to attract as many clients as possible, but they won’t be available to everyone. Thus, you can end up accepting a loan offer on which you pay a higher interest rate than you should.
In that case, you could benefit from any interest rate reduction. Even half a percent lav rente could bring you significant savings during the loan lifetime. So it doesn’t cost you anything to negotiate more favorable lending terms. But you need to know which institutions are willing to make these concessions.
Who Will Negotiate a Lower Interest Rate
Different lenders on the market have diverse loan offers and eligibility criteria. Likewise, lending institutions operate in different ways and use various methods to attract and retain clients. And you might think that they strive to keep their clients at all costs, so they’re probably willing to negotiate.
But the situation is not like that. Larger institutions, such as national banks, are among the safest lenders, but they’re not too flexible. They don’t change the conditions under which they borrow money, even if you’re their long-term client.
On the other hand, community banks, credit unions, and non-traditional lenders are willing to make some concessions to their clients, whether they’re just applying for a loan or have already received it. That usually applies to credit unions, which are non-profit organizations, that is, they work in the interest of society, not for profit.
Of course, you have to prove yourself as a worthwhile borrower to give your lender a chance to consider you for a lower interest rate. Your odds are even greater if you have a positive history with a certain lender, i.e., you’ve already borrowed money from them and returned it on time. In any case, you are in charge of improving your situation and putting yourself in a better negotiating position.
Boost Your Credit Score
When it comes to your financial habits and behavior, your credit score reveals everything. That’s precisely why lenders rely on this parameter the most when deciding whether to lend you money. And that’s why you can use your credit score to your advantage.
A high credit score presents you as a responsible borrower to the lender. It gives you the chance to get a lower interest rate from the very beginning. But it also allows you to negotiate better lending terms later if you plan to refinance the loan.
Credit score records all your financial activities and payments, meaning it registers all delays or missed payments. If there were once, try to make sure that there are no more. Every debt you settle on time or before the due date can do wonders for your credit score.
Also, credit cards represent a debt burden that has a significant impact on your credit rating. So try to pay off the card balance regularly, and try to keep its utilization rate at around 30%(find out how on this source). Also, you should have several different lines of credit that you actively use because this shows the lender you’re capable of managing and controlling your finances without over-indebting.
Avoid Hard Inquiries
In order to get a low-interest rate, borrowers can shop around and apply to several lenders at the same time. That’s a huge mistake, as so many applications in a short time can pull your credit score to rock bottom.
Every application triggers some form of a credit check, which is eventually reported to credit bureaus. And each can lower your score by a few points. Now do your math – too many of these is a significant hard inquiry.
The solution is to apply only for loans you’re eligible for. Of course, you can look for loans at lending platforms that use your data to find suitable deals. They don’t perform hard checks on your credit report, thus not affecting your score harshly. Instead, they help you find the best offer to apply for.
High Income and Stable Employment
These two items significantly strengthen your negotiating position, showing the lender you have enough cash and the ability to repay the debt on time. As such, you will be considered a less risky borrower, so lenders can make a concession and further lower the interest rate.
It’s good to know that some lenders can include a minimum income among the eligibility criteria. If you don’t meet this requirement, you might want to look for other lenders that don’t have it. But even so, it is clear that lenders prefer applicants who earn more and have stable employment.
Simply, lending providers need to get back the money they give out. So they approve loans only when they’re sure the applicants can meet their terms. And that’s why they check their financial conditions, income, and debt load.
The higher your income, the greater the chance you’ll pay your debts on time because, of course, you have enough money for that. That puts high-earners in a good position to get a loan with low interest, even when they ask for more money or shorter tenure.
Of course, employment history is also important, and it’s always good if it’s steady, without interruptions and frequent changes of employers. That shows you as a stable and reliable person. Also, your employer’s credibility matters, so working for a company that has an excellent credit rating is a huge benefit if you plan to negotiate better loan terms.
Getting better lending terms will also depend on how much money you borrow and for how long. The longer you commit to a lender, the more willing they’re to offer you better terms. The same goes when you ask for more money.
In both cases, you can negotiate the interest rate if you’re a credible borrower, but if you offer collateral, too. That’s a valuable asset that exceeds the loan amount and something the lender can use to settle with in case you don’t pay your monthly obligations.
This method represents a lower risk for the lender than an unsecured loan, so you can hope for a lower interest rate. But keep in mind that it puts additional pressure on you, as you’re at risk of losing something valuable, like a car, house, or whatever you pledged. So think carefully about offering collateral if you can’t really keep up with payments.
When asking for a loan, your first stop is finding a lender with the most favorable interest rates. Then, you can try to decrease them even more, but you have to prove yourself as a reliable borrower. You can do that in many ways, like working on your credit score, increasing income, or pledging collateral to give the lenders more trust in you.