Are you looking for the lowest possible interest rate on a personal loan? Take these five steps to keep your interest costs down. Image source: Getty Images.
When you take out a personal loan it’s really important that you look for the lowest interest rate possible. Interest is the cost you pay to borrow money, and the higher your rate, the more your monthly payments will be and the higher your total loan cost will be.
Getting the lowest possible rate could save you hundreds or even thousands of dollars in interest expenses -- but it will require a little bit of effort on your part. To make sure you aren’t throwing away money by paying too much in interest, take these five steps before you take out any personal loan.
1. Check your credit report and address any issues you can
When lenders decide how much interest to charge you for your loan, your credit score weighs heavily in the decision-making process. That’s because your score tells lenders all about your past borrowing behavior and gives them a pretty good idea of whether you’re likely to pay back your new loan on time.
Unfortunately, as many as 1 in 5 credit reports has an error on it. If yours does and the mistake on your report hurts your score, your interest rate may be much higher.
Even if there are no mistakes on your report, a single late payment in your past could reduce your score by as much as 100 points. If you accidentally paid late, consider writing a goodwill letter to your creditor to ask if they’d remove the record of your past mistake. They don’t have to, but some creditors will if you’ve been a good customer -- and this change could help boost your score bigtime.
2. Consider a cosigner if you need one
If your credit score isn’t very good despite your best efforts to fix any issues, your loan’s interest rate will be high because lenders view you as a credit risk. Likewise, if you don’t have proof you’ve been earning a steady income for a few years -- and that you make enough to pay back your loan -- you’ll be offered loans only at a high rate.
One way to improve your borrower profile is to ask a cosigner to agree to take shared legal responsibility for the loan. Cosigners are held legally liable for paying back the debt if you don’t, so creditors will feel much better if someone who has more income and better credit cosigns for you. If you can find a willing cosigner, your loan rate should be much lower as a result.
You should only ask someone to cosign if you’re 100% confident you’ll never miss a loan payment, as you don’t want to hurt the cosigner’s credit when they do you a favor.
3. Shop around among different personal loan lenders
You’d be surprised how much variation there is in loan interest rates from one lender to another. You don’t just want to accept the first loan you’re offered or restrict your search only to big local banks in your area. Also consider online lenders, peer-to-peer lenders, and credit unions. You may be able to get a much lower rate from an alternative source.
Many lenders allow you to rate-shop online without a hard credit inquiry, so your credit won’t be affected if you shop around. You should get as many quotes as you can -- but at least three to five -- so you can ensure the rate you’re offered is a competitive one.
4. Look into secured loans
If your credit isn’t great and you can’t find a cosigner, you don’t have to just accept that you’re stuck with very-high-interest loans marketed towards risky borrowers. You can also look into secured loans.
Secured loans require you to pledge collateral for the loan, so you need to have property or assets lenders will accept to guarantee the loan. If you’re able to get a secured loan, the rate may be lower than on an unsecured loan since the lender significantly reduces its risk.
5. Choose the shortest loan term you can
Shorter loan terms tend to come with lower interest rates because lenders aren’t tying up the money for as long and there’s less time for something to go wrong that leads to default.
If you can opt for a loan you pay back over two or three years instead of one you pay back over eight or 10 years, you’re likely going to get a much better rate. You’ll also pay less interest because you won’t be paying your loan off for as long -- potentially saving you a ton of money.
Take these steps to make sure your loan is affordable
Reducing the cost of borrowing is a smart financial move, as the more interest you pay, the less cash you’ll have for other things. While it requires a little bit more effort, now you know the steps to take to get a low-interest personal loan so you can make sure that borrowing costs as little as possible given your credit and financial history.