There’s nothing wrong with having to take out a loan. In fact, it can be a great way for entrepreneurs to acquire the money they need to get their business off the ground. However, people tend to run into problems when they don’t properly budget for paying back the money they borrow. Sometimes, though, it’s not always entirely the borrower’s fault.
No matter how solid their repayment plan is, some people who take out a loan are crippled by sky-high interest rates. This isn’t only true about large loans, either. Small loans can be as difficult to pay off as bigger loans if the interest rate is high enough. Luckily, there is plenty that you can do to lower your interest rate. Use this guide to find out how you can lower your interest rate.
Borrow for a Shorter Term
When you borrow money for a shorter period, the lender has to spend less time monitoring your payments and making sure you’re on track to repay all of your debt. The lender will also get their money back (plus interest) earlier. Thus, they may be inclined to offer you a lower interest rate if you sign an agreement to pay back your small loan over six months as opposed to two years.
If you know that you may have difficulty paying off loans, a shorter loan term can help keep the total interest that you incur as low as possible.
Improve Your Credit Score
One of the factors that lenders use to decide the interest rate of a loan is how reliable the borrower seems. If a potential borrower has a stellar credit score and a solid history of making payments on time, then there is no need to give them a high interest rate. And if you have a poor credit score, you may be forced to take out a bad credit loan, which typically comes with higher interest rates.
But there’s good news! If your credit score is poor or on the lower end of the average range, you can work to improve it before seeking out a loan. This will ensure you pay a smaller total amount than you would otherwise. So, if you are looking to save on your loan interest rates, improving your credit score can help. Here are a few ways you can make that happen:
- Pay your bills on time. Utility, phone, and internet providers report to credit bureaus, too, so be sure to always pay your bill before the due date.
- Keep your credit card balances low or at zero. Avoid maxing out your credit allowance.
- Avoid applying for too many loans at once. When a lender assesses your credit report, they make a note on it. If there are a significant number of these notes left on your credit report, your score can be impacted.
Choose a Variable Interest Rate
Most lenders offer borrowers the option to choose between either a fixed interest rate or a variable interest rate. As both names suggest, the titles have to do with whether or not the interest will change during the repayment period.
A fixed rate will remain the same for the entire duration that the borrower repays the loan. But, this type of interest rate tends to be on the higher side. Inflation, supply and demand, and government regulation are all factors that influence standard interest rates.
By doing a bit of research, you’ll be able to determine whether interest rates are going to rise or fall soon with a fair bit of accuracy. If interest rates appear to be on a downward trend, choosing a variable interest rate is the better of the two options because the rate is unlikely to rise throughout the duration of your loan repayment.
A variable interest rate is more suitable if you are opting for payday loans. For loans with shorter term chances are less that the figures will change much. But make sure to do your homework. If variable rates are high when you apply for the loan, then stick with the fixed.
Browse Different Lenders
The most basic and must-follow rule when applying for a loan is to research properly and compare different lenders to find a deal that is most suitable to meet your needs. It is not just about the interest rates, but all the conditions and terms of the loan that you should consider before choosing one lender.
Even if two lenders are near each other, the loan terms and interest rates can be drastically different. Thus, you should always take the time to browse if you feel as though the interest rate a lender offers you will be an issue. Sometimes, however, you may have to compromise. Lenders who offer lower interest rates may not offer the right small loans options for you. Be wary of this during your search.
Offer An Asset as Collateral
As previously mentioned, one of the ways lenders determine interest rates is by assessing how much risk they’re taking by giving money to a specific borrower. If a lender is not confident in your ability to repay the loan during the specified time, you may want to offer collateral to sway their decision.
Usually secured loans have lower interest rates because lenders get the cover in the form of collateral. If you think that you can provide collateral to the lender to reduce your interest rate, then you can discuss this with the lender. But make sure that you have a strong repayment plan.
Collateral could include a wide range of assets that you have, such as your home, your car, or even investments that you have. Should you fail to repay your loan, the lender would have the legal right to take your collateral as a form of payment. Due to this, you should never offer anything for collateral that you’re not prepared to lose.
Have a Friend or Family Member Cosign
If you’re having trouble managing your small loans due to the interest rates, consider having a friend or loved one cosign the loan agreement with you. This process is similar to collateral in that it can cause a lender to have more trust in you if they were on the fence about whether or not you would be suitable for a loan.
However, you should understand that failure to repay the loan under the given terms can have detrimental effects on your cosigner. Credit score penalties, late fees, and even wage garnishment are all possible. For the sake of the other individual and your relationship with them, never have someone cosign a loan (even small loans) if you are not prepared to pay them back in full plus interest.
Consolidate High-Interest Debt
If you are grappling with numerous high-interest debts, a consolidation loan may be the solution you’ve been looking for. Put simply, consolidating your debt means taking out a larger, lower-interest-rate loan and using it to pay off your higher-interest debt. You’ll be left with one monthly repayment instead of two, three, or more; a lower interest rate; and a suitable loan term, depending on your financial goals.
Even Small Loans Can Be Difficult to Manage
But, reducing your interest rate as much as possible with the above tips will make sure they are easier to handle. And, you’ll keep your family and friends out of trouble, too. Small loans can sometimes be a necessary part of life, but you should only take them out if you can repay them.
Finding a Reputable Lender
Some payday loan institutions use questionable means to get more money from their clients. One way they do this is through a continuous increase on the interest if the debt wasn’t paid on time. Be sure to check other companies and explore your options. Get to know the Australian laws on payday loans and cash advances. This way, you can report any inconsistencies with the way loans are given.
Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.