How Can I Get a Lower Interest Rate on a Loan?
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For this post, we’ve teamed up with our partners at Fairstone.
Picture this: You want to buy a car in the next few months, but know you’ll need a loan to cover some or all of the cost. This is a good opportunity to start increasing your credit score. Why? When it comes time to apply for a car loan, lenders will see that you’re demonstrating positive credit behaviour and as a result, will offer you a lower interest rate.
The benefit of a lower interest rate on your loan?
When you pay back a loan, a portion of each payment will go towards the principle and a portion will go towards interest. The lower your interest rate on a loan, the less you’ll pay towards interest each payment. The result? By the time you’re done paying off the loan, you’ll have paid less money overall.
Below our partners at Fairstone share some tips on how you can access a lower interest rate on your next loan.
Here are some tips that will help you demonstrate positive credit habits to future lenders:
- Make on-time payments (even if it’s just the minimum payments): Ideally, you should be able to make full payments to all your bills each month. But, if something comes up one month and you really can’t afford to make a full payment, it’s important to at least cover the minimum payment. This will prevent a negative impact to your credit score.
- Use less than 25% of your credit card limit: Show future lenders that you’re proactive with your credit situation by resisting the urge to rack up more than 25% of your credit card limit.
- Limit credit inquiries: Once you’re ready to buy a car, you should visit as many lenders as possible to shop around for the best rate. Sounds like a good approach, right? Wrong. Unfortunately, too many credit inquiries in a short timeframe can negatively impact your credit score. Lenders try to mitigate their risk of not being paid back, so they’re going to assume that you follow through with every inquiry on your report. Instead, shop around at companies that offer a quote or estimate that uses a soft credit check (this type of credit check does not show up on your credit report).
Sometimes, you need a loan unexpectedly and don’t have time to work on increasing your credit score. If you fall into this situation, there are still some tips that can help you pay less interest on your loan.
Here are some options that can help lower your interest rate on a loan:
- Choose a secured loan: A secured loan is backed by the value of your house, giving lenders greater confidence that you’ll pay back the loan on time. Because of this, you can access a lower interest rate. Another bonus? You could qualify for a larger loan amount as well.
- Choose a shorter loan term: A shorter loan term doesn’t necessarily secure you a lower interest rate, but with a shorter term you’ll pay less interest fees during the course of your loan.
- Make your loan payments on a bi-weekly schedule: Again, bi-weekly payments are not necessarily going to get you a lower interest rate, but will instead reduce the amount of interest you pay on your loan. The reason? A bi-weekly payment schedule means you’ll make 26 payments a year compared to only 24 payments with a semi-monthly schedule. The extra payments you make on a bi-weekly schedule help reduce your loan balance at a faster rate than any other payment option meaning you’ll pay off your loan faster and pay less interest. The best part is you’ll hardly notice a difference compared to semi-monthly payments.
Interest is something we’ll all have to pay at some point in our lives, but if you follow these tips you can reduce the amount of money you pay in interest charges. That means more money in your pocket for things like retirement savings, buying a house or an emergency fund!
Interested in shopping around for a loan, but don’t want to impact your credit score? With Fairstone’s online loan quote, you can find out how much money you qualify for and what your payments might be without affecting your credit. And, it only takes a few minutes – get a quote today.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.