How To Renegotiate A Loan When Your Credit Improves

How To Renegotiate A Loan When Your Credit Improves

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated June 23, 2022

Has your credit improved since you took out a loan? If so, you may be in a position to renegotiate a lower rate and better terms. 

Your credit scores play a key role in the interest rate and terms your lender offers when you apply for a loan. The higher your scores, the better your chances of qualifying for a lower rate and better terms. 

Read on to find out how to renegotiate your loan when your credit improves as well as what other alternative options you have to ease your debt burdens. 

Can You Renegotiate Your Loan Terms If Your Credit Improves?

It’s possible to negotiate a lower interest rate or better terms if your credit scores have increased since you initially secured the loan. It all depends on your lender, your loan type, and your negotiating skills. 

More specifically, unsecured personal loans place much more weight on your credit score than other loan types. In this case, a higher credit score could incentivize your lender to give you a better rate and terms.

However, if it’s a secured loan in question — which means it’s backed by collateral — your lender may not be as open to renegotiating your loan, since the asset that’s collateralizing the loan is already playing a role in helping you get a lower rate.  

What Can You Renegotiate?

There are a few features of your loan that you may be able to renegotiate when your credit improves:

Lower Interest Rate 

One of the first things you might want to renegotiate with your lender is your interest rate. The lower the rate, the less you’ll pay overall for your loan, so it’s in your best interest to try and get your rate reduced to help you save money. If you’ve been diligent with your monthly loan payments and can prove that your credit score has increased enough to warrant a better rate, your lender may be more inclined to give you the rate you deserve.

New Payment Plan 

If you’re in a position where you’re having trouble making your payments, you may want to speak with your lender about adjusting your payment plan. Among your options are long-term repayment plans and forbearance agreements.

  • Increasing Your Loan Term – A longer-term loan means you’ll have more time to fully repay the loan. That means each payment you make will be smaller and may better fit your tight budget. 
  • Forbearance Agreements – With this agreement, your lender will establish a specific time period in which you’re not required to make payments. Keep in mind that interest will still accrue during this time, though the agreement will allow you to keep some cash in hand for a temporary amount of time so you can avoid defaulting on the loan. 

One-Time Payment

Your lender or creditor might let you make a one-time lump sum payment to be put towards the principal portion of your loan. If you are concerned that you’ll miss future payments or already have, your lender may agree to this one-time payment to help avoid any loan defaults. 

This is especially true if you’re considering bankruptcy. Bankruptcy is not only bad for you, it’s not an ideal situation for lenders, either. In fact, allowing you to make a one-time payment could save the lender money if it means you won’t have to file for bankruptcy. 

Steps On How To Renegotiate A Loan

If you believe you have a strong case to have your loan terms renegotiated, follow these steps:

Step 1: Review Your Contract

Before calling your lender or creditor, make sure you look over the details of your loan agreement to see if there’s a clause that requires you to pay a penalty fee for repaying your loan early. If so, you may want to focus your negotiating skills on getting a lower rate rather than asking for a shorter term.

Step 2: Review Your Credit 

It’s a good idea to get a copy of your credit report before calling your lender. You can get a copy for free from either of the major credit bureaus in Canada — TransUnion and Equifax. You can also access your credit report or score from third-party credit score providers or even some banks.

Grabbing a copy of your credit report will help you keep tabs on your credit score and identify any errors on your report that could be pulling your score down. If you spot any mistakes, have them disputed and corrected right away before you start the renegotiation process. Doing so may help give your credit score a bit of a boost, which can strengthen your negotiating power.

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Step 3: Shop Around and Compare Offers 

Call a few other lenders or creditors to see if you can get a similar loan product with better terms and a lower rate with your improved credit score. Gather a few quotes and take them to your lender to show them that you’re able to qualify for better terms elsewhere. 

If the lender matches these terms, great. If not, at least you know you can get better terms with another lender.  

Step 4: Contact Your Lender To Renegotiate 

Following all these preliminary steps will help you get a sense of what you may qualify for and will help you prepare for the negotiating process. Ideally, you may want to schedule an in-person session so you can bring all relevant documents with you. 

Most lenders won’t want to lose your business to another lender. If you can show the lender that you’ve been offered something better and cheaper somewhere else, they’ll likely match or offer you a better deal in order to retain your business. This is particularly true if your credit score was lagging before but has significantly improved since your application.

Tips On Renegotiating Term Of A Loan

There are a few tips that you should consider before renegotiating the terms of your loan with your lender:

Time It Right

Don’t approach your lender if your credit score is still sub-par or if you have a history of late or missed payments. Wait until you’ve made some strides in boosting your credit score and make sure that you have at least one to two years’ worth of consecutive timely payments. This will show the lender that you’re responsible with your finances and deserve better terms on your loan.  

Be Persistent

When negotiating the terms of your loan, you don’t want to be aggressive in your dealings, but you also don’t want to be too meek when negotiating with your lender. 

Be confident with your dealings and bold enough to kindly request the matter be escalated to upper-level management if the representative you’re speaking with won’t budge. Just make sure to be polite and respectful.

Keep Accurate Records

Make sure you are armed with documentation that contains accurate records of your debt so you’re in a better position to renegotiate. 

Other Alternatives To Renegotating A Loan

If your lender turns you down during your negotiations despite your best efforts, all is not lost. Take a look at some other options that may be available depending on your particular situation:

Debt Forgiveness 

If you’re in a real financial pickle and are at a real risk of loan default (or worse), then consider debt forgiveness. This involves part or all of your debt obligations forgiven by your lender or creditor. 

Debt forgiveness is more commonly seen in the real estate world. If it’s your mortgage that you’re worried about, this may be a viable option. Lenders may be interested in working out an arrangement with you to accept your property deed as full payment of the loan rather than going through the foreclosure process, which hurts both you and your lender.

Loan Consolidation 

If you have multiple high-rate loans on the books, you might want to consider consolidating them into one loan with a lower interest rate. Loan consolidation will not only help you save money with a reduced rate, but it will help manage your debt using one loan versus several. 

Refinance 

As mentioned earlier, another lender may offer you a better deal after a little comparison shopping. If so, consider refinancing your current loan with a new one from a different lender. Some lenders may even be open to paying off your current loan for you. Just ensure you’re doing your research before settling for a lender. 

Extra Payments

Whether it’s from a bonus or raise at work, a monetary gift, tax refund, or any other source — your funds towards the principal portion of your loan to pay it off sooner rather than later.

Loan Renegotiation FAQs

Can I negotiate the rates and terms of my student loan?

Yes, you can renegotiate your student loan rate and terms if you hold your loan with a private lender. However, government-backed student loans generally come with non-negotiable terms, which would make renegotiating them more difficult.

What credit score is considered ‘good’?

According to Equifax, a ‘good’ credit score is one which falls within the 660 to 724 range.

Can I renegotiate a loan with a cosigner?

If you took out a loan with the help of a cosigner, it might be difficult to renegotiate the terms of the loan. That’s because the co-signer’s credit score is likely one of the main reasons why you were able to get approved at the rate and terms your lender gave you. That being said, if your credit score has improved quite a bit and is now even higher than your cosigner’s score, you may be in a better position to refinance it in your name with a lower rate.

Final Thoughts

If you’ve worked hard to improve your credit score, you may be able to renegotiate your loan rate and terms with your lender. If not, there may be other options available that can help you snag a more affordable financing option that will keep more money in your pocket.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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