Taking out a loan is a big financial decision that can impact your finances for years to come. One of the most important factors when taking out a loan is the interest rate. The interest rate determines how much extra you’ll end up paying on the loan over time. Getting the best possible interest rate can save you thousands of dollars over the life of the loan.So lets discover here is how to get the best interest rate on a loan.
Here we’ll provide tips and strategies for getting the lowest interest rate possible on a personal, auto, mortgage, or business loan.
Research Current Interest Rates
The first step is researching the current interest rate environment. Interest rates fluctuate frequently and are influenced by economic factors like the federal funds rate. It’s important to educate yourself on the current rate environment so you know what rates are realistically available.
Check online resources like Bankrate.com to see average interest rates for different loan types. You can also call lenders directly to ask what rates they are currently offering. Focus your research on the type of loan you need – auto loan, mortgage, personal loan, etc.
Knowing the current rate environment gives you a benchmark to compare quotes against. You’ll be able to tell right away if a lender is offering you a reasonable rate or not.
Check Your Credit Score
Your credit score is one of the biggest factors lenders use to determine your interest rate. Individuals with higher credit scores are seen as lower risk and are rewarded with lower rates. Before applying for a loan, always check your credit reports from Equifax, Experian and TransUnion.
Look for any errors on your reports that may be dragging down your score. Dispute any inaccurate information to get it corrected. Pay down balances on credit cards and other revolving debt. This can also help boost your credit score quickly before applying for a loan.
A score of 740 or higher is generally considered excellent credit and will qualify you for the best rates. If your score is lower, take steps to improve it before applying. Even small improvements can mean a lower rate and savings.
Shop Around With Multiple Lenders
Never take the first loan offer you receive. The exact same loan from another lender may have a lower rate. Standard advice is to compare rates from at least 3-5 different banks, credit unions and online lenders.
Focus your search on lenders who specialize in the type of loan you need. For example, if you need a mortgage, compare quotes from several mortgage lenders. If you need a car loan, get pre-approved from multiple auto lenders.
Online lenders are also worth considering. They often offer competitive rates since they have lower overhead than brick-and-mortar banks.
Get quotes from each lender and compare all the costs – not just the interest rate. Look at origination fees, application fees, and any prepayment penalties. This will give you a complete picture to find the cheapest overall loan.
Consider Federal Student Loan Consolidation
If you have existing federal student loans, one way to potentially lower your interest rate is by consolidating them into a Direct Consolidation Loan. This combines all your federal loans into one new loan with a fixed interest rate.
The rate on the consolidation loan will be the weighted average of your existing federal loan interest rates, rounded up to the nearest 1/8th of a percent. Depending on your current mix of rates, consolidation can lower your overall interest rate significantly.
Consolidating federal student loans is free through the Department of Education. You can apply online and you don’t need a credit check. Consolidation also gives you access to alternative repayment plans and public service loan forgiveness.
Improve Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your total monthly debt payments to your gross monthly income. The lower your DTI, the more affordable the new loan payment appears. Lenders generally prefer a DTI of 36% or less on new loans.
Paying down existing debts – like credit cards, auto loans and student loans – can improve your DTI before applying for a mortgage, auto loan or personal loan. This shows lenders you can handle the new loan payment comfortably along with your other obligations.
If you can’t pay down debts, increasing your income can also lower your DTI. Taking on a side job or freelance work for a few months before applying for a loan can have the same positive effect as paying down debts.
Make a Large Down Payment
The size of your down payment also affects the loan’s interest rate. Lenders view larger down payments as less risky. If you’re taking out a mortgage, auto loan or personal loan, the larger down payment you can afford, the better the rate.
For mortgages especially, a down payment of 20% or more on the home’s value can help you qualify for the lowest rates. With a down payment less than 20%, you’ll likely have to pay private mortgage insurance which increases your monthly payment.
For auto loans, buyers who put down at least 20% of the vehicle purchase price tend to get better rates. If you’re borrowing $20,000 to buy a car, try to put at least $4,000 as a down payment.
Apply with a Co-signer if Possible
Adding a creditworthy cosigner to your loan application can also help you secure a lower interest rate. A cosigner shares responsibility for the loan and their income and credit score are factored in by the lender.
For younger borrowers with little credit history – like those buying their first car – a parent as cosigner can make approval easier and improve the rate. The cosigner’s income and assets provide additional security, allowing the lender to reduce the rate.
Just keep in mind the cosigner is equally responsible for repaying the loan. Make sure it’s someone willing and financially able to take over payments if you can’t. Discuss expectations clearly with them before applying for a loan together.
Provide Collateral if Possible
Secured loans that require collateral also qualify for better interest rates. With a secured loan, you pledge an asset you own – like a savings account, certificate of deposit (CD) or vehicle – as collateral for the loan.
If you default on the loan, the lender can seize the collateral to recoup their losses. Because of this reduced risk for the lender, secured loans come with lower interest rates.
Home and auto loans are examples of common secured loan products. For personal loans, some banks offer secured options allowing you to get a lower rate if you have assets to use as collateral.
Just be aware of the risks, as you can lose your pledged asset if unable to repay the loan according to the terms. Weigh this risk before using valuable property as collateral.
Ask Your Current Lender for a Better Rate
Before leaving your current lender when refinancing or taking out a new loan, ask them if they can beat the competitor offers you’ve received. There’s a good possibility your existing bank or lender will offer a rate match or rate reduction to keep your business.
This is especially true for mortgages, where lenders want to retain existing clients. If you’ve always paid your mortgage on time, the loan officer may be able to get approval for a lower rate from their underwriters without you having to refinance. This saves you time and money on another round of closing costs.
For any loan product, don’t be afraid to directly ask your lender, “Can you match this lower rate I was quoted?” The worst they can say is no.
Improve Your Loan Terms
In addition to lowering your interest rate, improving other loan terms can also save you money:
- Loan Term – The longer the term, the lower your monthly payment will be. For mortgages and car loans, choosing the longest term available will give you the lowest interest rate. Just be sure you’re comfortable with the overall costs over that longer timeframe.
- Loan Type – Fixed rate loans often come with higher rates but your rate stays the same over the life of the loan. Adjustable rate loans start with a lower “teaser” rate but it can increase substantially over time. Locking in a fixed rate gives you consistency.
- Origination Fees – Try negotiating these fees with the lender or shop around until you find a lender that charges lower fees. Even small variations in origination fees can make a difference on overall costs.
- Prepayment Penalties – Avoid loans that penalize you for paying off the balance early. Prepayment penalties lock you into the loan and limit your flexibility.
Being proactive about optimizing these terms, along with interest rate shopping, can add up to significant savings.
Maintain Good Credit During the Process
It’s important to maintain responsible credit habits while shopping for the best loan rate. Avoid taking on new debts or closing existing credit accounts. Don’t make any large purchases on credit or apply for other loans.
Lenders will check your credit right before approving your loan. If your score or debts have changed substantially from your initial application, it could result in a higher rate or even denial. Keep your credit profile consistent until your new loan is approved and funded.
After being pre-approved, wait until you have a purchase contract or are nearing your loan’s closing date before shopping for other credit.
Weigh the Costs and Benefits
Getting the lowest possible interest rate shouldn’t be your only consideration. There are always trade-offs to factor in:
- Lower rate vs. longer term – A longer repayment timeline means you pay more total interest over the years. Make sure you’re comfortable with the longer obligation.
- Lower rate vs. fees – Don’t just look at rates, higher origination fees can outweigh initial rate savings. Do the math on the total costs.
- Lower rate vs. limits on flexibility – Prepayment penalties may make it expensive to refinance or pay off the balance early. Understand any restrictions.
- Lower rate vs. collateral risk – With secured loans, make sure you understand the consequences if you default and lose pledged assets.
Carefully weigh the pros and cons of any trade-offs to make sure you make the right overall choice, not just the lowest rate.
Be Ready to Move Quickly
When you find a competitive loan offer, be ready to act quickly and complete the application. Interest rates fluctuate frequently and today’s low rates may not last. Ask the lender how long the offer is good for and try to submit a complete application as soon as possible.
For mortgages, lock in the interest rate once your offer is accepted on a home. Locking the rate prevents your quoted rate from changing while you finalize the loan. There is often just a short window to lock your initial rate.
Be responsive to your loan officer’s requests for documentation and signatures. The faster you can provide requested items, the smoother the approval process will be. This will lock in your low rate and costs.
Moving promptly on attractive loan offers helps guarantee you get the quoted terms. Sitting on offers could expose you to higher rates down the road.
Consider Alternative Scenarios
Look at alternatives beyond the standard loan offerings:
- Buy down your rate – Paying “points” upfront to buy down your mortgage rate can save substantially on interest costs over time. Ask your lender for buy down options.
- Servicemember benefits – If you or a family member served in the military, check for lenders offering veteran/military discounts. USAA often offers special rates.
- Negotiate fees – Politely ask if lenders can remove or reduce origination fees. They may meet you halfway.
- Credit union – If eligible to join, credit unions often have better loan rates and lower fees than banks.
- Rewards/bonus cash – Some credit card and auto lenders provide cash bonuses that can be used to pay down balances and offset loan costs.
Follow Up on Pending Applications
If it takes more than a couple weeks to get approved and finalize your loan, follow up periodically with your loan officer for a status update. Check that they have all required documents and find out if anything else is needed from you.
Sometimes loan approvals get delayed for administrative reasons. Being proactive about checking status helps ensure there aren’t any hang-ups costing you time and letting your rate expire.
You’ve worked hard to get the best deal possible – don’t let the rate get away from you!
Summary
Finding the best loan interest rate takes research, comparison shopping and discipline. But taking the time can save you thousands of dollars over the lifetime of your loan. Follow these guidelines when getting your next mortgage, auto, personal or business loan:
- Research current average rates and the market environment
- Check your credit score; take steps to improve it if needed
- Get rate quotes from at least 3-5 different lenders
- Consider federal consolidation for student loans
- Increase your down payment amount and improve your DTI
- Add a creditworthy cosigner if possible
- Use collateral to get a secured loan
- Ask your current lender to match a competitor’s rate
- Optimize additional loan terms like length and fees
- Maintain good credit habits until your loan closes
- Act quickly when you find a good offer
- Weigh the pros and cons of any trade-offs
- Explore alternative options and scenarios
- Follow up on pending applications until approved
Using these tips can take some time and effort up front. But the savings over the long run are well worth it. Being smart about getting the lowest interest rate will pay off every month and over the many years of your loan through substantial interest savings.