Use these four strategies to get the best loan rates and save thousands on your next loan
One of the most common questions I get from readers is whether a percent or two really matters on their loan. They’ve usually been offered a loan rate and are not sure if they could find a better rate somewhere else but wonder if it’s worth it to even shop around.
When I show them how much they could save by getting the best loan rates available, they always make the time to look around.
How much would you spend to save almost $60,000?
One percent may not seem like much but it can add up over years of paying interest, especially on high loan amounts. Just a 1% difference means you’ll pay an extra $59,176 in interest for that $250,000 home loan over 30 years.
When you consider the hundreds of thousands of dollars a person borrows throughout their life for mortgages, credit cards and other spending, getting the best loan rates can mean the difference between reaching your financial goals or not.
How to Get the Best Loan Rates
There’s really four quick ways to make sure you’re getting the best loan rates available and one way that can lower your rates but will take time. You could be paying a loan down for decades, make sure you spend a little time to get the best deal.
Check your rate with different creditors. Most auto, mortgage or personal loan lenders will do a soft inquiry on your credit to estimate your interest rate. This type of credit check does not affect your credit score so there is no harm in checking with a few different lenders. It’s the hard inquiry that will stay on your credit score for up to a year so make sure you’ve settled on a lender before you agree to this kind of credit check.
I put together a list of 24 peer to peer online loan and personal loan websites to get you started. Checking your rate on most of them takes less than a minute and most loans can be funded within a week. If you’re looking for a mortgage loan, I would recommend one of the loan aggregators like Lending Tree which shops your loan around to its network to get the best loan rates.
Compare your rate. Rates can vary quite a bit for different types of loans and through different sources but there is some data available to check your loan rate against averages. I put the graph below together with data from myFICO and Prosper to show average loan rates for different credit scores.
Using averages for loan rates, you can see how your loan stacks up against others with credit scores similar to yours. Comparing your rate to the averages might not help you get the best rate available but it will give you the confidence that you’re getting a good deal.
Getting the right type of loan is just as important as the rate. Check out these types of loans and which is best for your needs.
Ask for less money and less time. Two loan factors beyond your credit score affect your interest rate, the amount of the loan and the time until it’s paid in full. Lending larger amounts of money means more risk for lenders so they are going to require a higher interest rate. They’ll also want a higher return if they are going to be carrying the loan for longer.
Getting a better loan rate can be as simple as asking for a little less and paying it off over less time. Do you really need a 30-year loan or can you take out a shorter-duration loan and then refinance it if necessary? Just because you are approved for a higher amount, doesn’t mean you need to borrow up to your maximum.
Thinking about time and loan amount not only means you’ll get the best loan rates but also the right loan for your needs.
Secured loans are cheaper. Loans on collateral like your home or car usually offer the best interest rates compared to unsecured personal loans. Lending money without collateral is riskier and the lender is going to require a higher rate.
You might be able to get a better rate and save money if you can refinance your home or auto loan. One caveat is to be sure to understand the extra costs that might come with a secured loan like the appraisal fee, mortgage insurance or origination fees.
While it might not help you get the best loan rates immediately, the surest way to get lower rates is to improve your credit score. Increasing your score just 20 or 30 points can mean a 3% difference and thousands saved on your next loan.
I put together a list of 21 steps to fix your credit score in six months or less, some that can improve your score immediately. Make sure you understand what factors affect your credit score and the interest rate you’re offered by lenders.
Debt is a tool and you can’t ignore it your whole life. Without debt, you may never be able to get the home of your dreams or the education that will get you the job you deserve. Using debt doesn’t mean you need to be a slave to high interest rates though and getting the best loan rates may be easier than you imagined.