Do you want to know the secret to ensuring that you get a loan that you can afford and covers all your costs?
If you’re trying to get the best deal on small loans, spend more time thinking about the interest rate than the total amount and your monthly payments.
Does that sound strange to you? It won’t after you finish reading this post. If you want to learn about why interest matters for loans and how to lower your interest rates, read on.
The Truth About Interest
When most people look for personal loans, they focus on their monthly payments and the overall value of the loan. These are good things to pay attention to, but they aren’t the most important part of affording your loan.
Financial experts agree that interest rates are going to be the driving force behind the true affordability of your loan.
Rates can rise and fall depending on your income or the market. If they steadily increase over time that could drastically affect how long it takes you to pay off your loan in full.
It’s also important to keep in mind that interest is how lenders make money. The longer you’re paying off your loan because of a high-interest rate, the more money your lenders stand to make.
High-interest rates are what can make usually affordable small loans into financial burdens.
Imagine getting a small loan for $2000. A monthly payment of around $50 may seem affordable even if it would take longer to pay off. On the surface it seems like a great deal, but when interest factors in it can be a burden.
The difference between a 4.5% interest rate and a 9.8% rate could mean additional months or years of repayment.
If you want to pay off your loan fast, you’re going to want to do what you can to get a low-interest rate when you first negotiate your loan.
A Note On APR
Before we talk about ways to lower your interest rate, it’s important to consider the other factors that can make a seemingly great loan expensive over time.
Interest can add a lot to the cost of a loan, but other fees can add on to the original price. Loan origination fees, your request fees, and other fees specific to your bank or lender can start to add up.
When you’re shopping around for loans, be sure to compare the annual percentage rate (APR) for each one you research.
When you’re looking for loans, the APR should include all of the fees and your interest. It’s the one way to accurately determine
A personal loan APR is calculated to include all fees and interest which will reflect the true cost of your loan.
Don’t make the mistake of agreeing to a loan before you know the APR. You could end up paying more than you intend.
How To Get Good Interest Rates For Small Loans
You have more power than you think when it comes to negotiating lower interest rates for small loans. The lender may have the final say in interest, but you can do a lot to influence their decision.
Do you want to get small loans and keep the interest rates reasonable? Make sure you follow these steps when you’re preparing to get your loan.
Ask The Right Questions
When you’re talking to lenders about the loan, you’re going to have a lot of questions to ask in general. If you want to learn everything about interest, make sure you ask these key questions:
- How do you calculate your interest rate?
- What is the highest interest rate increase for each adjustment period, and what will it be over the lifetime of the loan?
- How much would my payment be today if the interest rate were calculated as it will be at the first adjustment period?
- How much would my monthly payments be if I were to get the highest interest rate?
- When can the interest rate be adjusted, and how often can it be adjusted during the lifetime of the loan?
See, getting a low-interest rate for small loans can be as simple as asking a few questions.
Shorten Your Loan Term
One of the easiest ways to get low-interest rates on small loans is to have the shortest loan term possible.
Your base monthly payments may be cheaper when you have the longest term, but your interest costs will start to add up.
Many lenders will choose to gradually increase interest rates as the years go on. It’s important to fully understand the interest rate as the years go on to truly understand how much you’ll be paying.
Take on the higher monthly payments and a shorter loan term for the lower interest. You’ll pay off your loan faster and you’ll save a lot of money on interest.
Consolidate Your Debt
We previously mentioned that having too much debt can make you look like a bad candidate for small loans.
If you want to get a low-interest rate and improve your chances of getting a loan that suits your financial needs, take care of the debt you already know.
Pay off as much of your debt as you can. Be sure to make your payments on time and to go above the minimum payment.
If you happen to have student loans or loans from the same lender, ask them about consolidating your debt or refinancing your loans. They may be able to combine everything into a single monthly payment or even lower your interest rate.
Have An Excellent Credit History And Score
Your credit matters for small loans. You’ll want to make sure that your record is polished before you look.
If you have had a poor credit history and a low score, take time to improve both before you get your small loans. It may take longer than you’d like, but in the end, you’ll get a much better rate if you have a good history.
Make your payments on time, even if you can only do the minimum. A history of continual late payments won’t make you look appealing to lenders.
Also be sure to utilize the credit that you have access to. Late payments aren’t good, but not using credit cards and other lines of credit isn’t helpful either.
Improve Your Debt to Income Ratio
Your credit history isn’t the only things lenders take into consideration when they’re giving out small loans. They’ll also want to know about the amount of debt you have and the income you’re able to bring in.
The industry term for this is debt-to-income ratio, also commonly known as a DTI.
Your DTI is determined by the amount of debt your already owe to other creditors and lenders, your monthly income, and the loan amount you want to take out.
Having a low debt to income ratio can help improve the chance of getting a low-interest rate.
Be Realistic
If you want to have low-interest rates for your small loans, you need to have an understanding of your true financial needs. Don’t think in hopeful terms, be realistic about what you can and can’t afford.
Take time to go through your monthly budget and see how much you can afford to spend. See if you can cut spending anywhere so you can contribute more to making payments.
Don’t get a loan that’s bigger than what you need. The extra amount of money may not seem too appealing once you find out what you’ll be paying for it in interest.
Be Ready To Negotiate
If having a low-interest rate is important for you, think about what you’d be willing to do to get it.
Many lenders are willing to give out lower interest fees in exchange for other things. You may take on a higher monthly payment, or take on a shorter loan lifetime.
Talk to the lender about what you want and what you’d be willing to do to get a lower rate.
Show Your Work History
Lenders of small loans are going to want to lend to people they know will be able to pay them back. Showing that you have a solid history of work and steady income can help you get the loan that you want.
Bringing a resume may be helpful, but what lenders really want to see is proof of your income. A few paystubs should be enough to establish your income history. If you can’t access those, bring bank statements and highlight where deposits were made.
Next Steps
Now that you know what it takes to get low interest on small loans, it’s time to think about other ways to secure your financial future.
If you already have a loan where you need something bigger than an interest rate change to help you, read our post on how to refinance your loan. Be sure to check out other posts in our Learning Center for more financial information.
Do you have other finance questions and want extra help? If so, contact us today so we can answer your important questions.