How do creditors earn money? Simply said, it is the ‘interest’ which keeps them in business. But that doesn’t mean as a borrower, you have to be saddled with high rates of interest.
Here are steps you can take to ensure that you get a better deal for a loan, with reasonable interest rates
Every month, you make a payment towards your loan, a part goes towards reducing the balance (the principal) and the other portion goes in making interest payments.
It is common knowledge that your credit score is a big factor in ensuring how much your creditor will charge as an interest against the loan amount. But there are other factors that also help in influencing the interest rate, which is given below –
Debt-to-income ratio – This is a ratio that tells you how much debt you have, in relation to your income. Generally speaking, lenders look at borrowers with DTI at 41 percent or lesser as ideal to lend credit. If you are above this percentage, then lenders assume that you have more debt than you can handle, which means that if at all they offer you credit, they will do so at a higher interest rate to counterbalance the risk. In order to bring down the DTI, you have to –
Make substantial payments regularly to bring down your debt load quickly.
- Figure out how much and how quickly you can reduce your debt load in a month.
- Make use of a balance transfer credit card with a zero percent APR for the introductory period, so that you can shift all the high-interest balances to this one so that you can make your payments comfortably without the interest burden on your head.
- Defer luxury spending or erratic purchases so that you can trim your finances and use the saved money to clear your existing debts.
- Look out for ways to supplement or increase your income.
- Do not miss your payments – Late payments can impact your credit history, which in turn make creditors think twice about giving you credit at low-interest rates. It is natural for lenders to raise interest rates for people who are late with their payments. Thus, it is important to make your payments on time and stick to a schedule.
- Review your credit reports – You can get free credit reports from each of the three major credit bureaus, Experian, Equifax and TransUnion once in 12 months. This is your easy opportunity to go through these reports and find out if there are any incorrect data reporting and discrepancies. If you find any errors, make sure you bring them to the notice of the credit bureaus and ask them to make the necessary corrections or remove them, as required. If your credit reports are clean, your credit score is good enough for lenders to offer you credit at low rates.
- Do not shop for different loans at a given point in time – It is tempting for some of us to go for loan shopping within a short period of time. But when this happens, lenders perform what is known as a ‘hard inquiry’ on your credit report. When there are too many hard inquiries on your report, your credit score can be impacted negatively. It is assumed that you are someone who relies on excess debt, which makes creditors apprehensive of giving you a loan at a lowered interest rate. Normally, your credit score may not be affected when you are checking out with different lenders for the same product, for example, a mortgage.
- Do comparative shopping – Taking a leaf from the above point, you should compare various lenders offering the same product and find out what they exactly offer in terms of their product, service, interest rates and more. While one may offer credit at a higher interest, it is also possible that the next one may give you a competitively priced one.
Smart thinking and a disciplined attitude can go a long way in ensuring that you get credit at low-interest rates.