How to Lower the Interest Rate on a Personal Loan

A personal loan is a good credit option to get cash quickly. In some instances, the money can be deposited into your bank account in just 24 hours. You can use the loan money for any purpose – for a medical emergency, for home improvement, a long-awaited holiday, for debt consolidation, or to manage an unexpected expense. It is an unsecured loan, which means that you can get the money without any collateral.

But you should know that lenders perceive personal loans as riskier, as they are unsecured, and as a result, the interest rate is generally higher. So, you should be careful when deciding whether you want a personal loan. However, the good news is that there are ways to lower the interest rate, making repayment easier.

Follow These Golden Rules to Lower Your Interest Rate

1. Compare different lenders – It is always a good idea to compare different lenders before you commit yourself to the loan. The terms and conditions and interest rate always vary from one lender to another. Even a small difference in the interest rate can make a big difference in the amount you have to pay back.

Visit different lending agencies or use an online comparison tool to compare various short-term financing options. You will be able to arrive at the right decision once you know what the different lenders are offering.

2. Improve your credit score – Every lender will check your credit score when deciding whether to approve or reject the loan application. The check is carried out to evaluate your creditworthiness. A credit score of more than 750 is good. It shows the lenders that you are committed to meeting your financial obligations. They deem you as a reliable borrower.

Your loan application will be approved, and you will likely also attract a lower interest rate. You can also check your score. If you notice any discrepancies, then you should immediately report them to the agencies and get them fixed. Apply for the loan once you have a higher score.

3. Always pay your EMIs on time – You will have to repay the borrowed amount and the interest money through Equated Monthly Installments or EMIs. Never miss an EMI. Arrange for automatic payment from your bank account every month to ensure that you don’t miss. Lenders always prefer borrowers who have a consistent track record of timely payments. A history of timely payments demonstrates financial responsibility, which will strengthen your application and attract a lower interest rate.

Lenders will also report your payment history to the credit agencies. Your credit score will improve if you make timely payments, which will push up your creditworthiness and lower the rate. On the other hand, your score will go down if you miss payments.

You will avoid paying additional interest charges and late penalties if you pay your EMIs on time. This will reduce your financial burden. Delayed payments, on the other hand, increase the cost and block future loan opportunities on favorable terms.

4. Balance transfer – If you are already on a loan at a high interest rate, then consider shifting to a new lender that is offering a lower rate. This may save you a lot of money. Also, consider debt consolidation if you have several existing debts, like small loans or credit card balances. Debt consolidation will let you combine them into one single loan. Take this loan to pay off all existing older debts. You will then have one loan with a single monthly payment. This will make debt management simpler and is also likely to reduce your monthly payments and total interest outflow.

5. Fixed or floating interest – With some lenders, the interest rate is always fixed, meaning you must repay the same amount each month. However, others allow a reduced rate of interest. Here, typically, the repayment amount will be the highest in the first few months, and this will be followed by lower subsequent months.

If you are considering transferring the loan balance to another lender, then consider choosing a lender that allows a reduced rate of interest. Here, the lender will calculate interest on the outstanding principal after each EMI payment. So, the principal and also the interest charged will reduce as you repay the loan. This will reduce your total interest cost greatly. Your financial liability will decrease.

6. Make part payments – Check whether your lender will allow part payment, which is larger than the monthly EMI amount. Some lenders will allow this, while others won’t. You may consider doing this if you have some extra cash. Part payment will lower the principal amount, and thus, reduce your future interest obligation. There can be a pre-payment charge. Even then, paying back a substantial amount will reduce your total interest outflow.

7. Take a secured personal loan – This is another viable option for those who can offer collateral. With a secured loan, the interest rate is going to be substantially lower. Lenders agree to this because the collateral reduces the risk for them.

8. Loan with a shorter tenure – The interest rate will be lower if the total loan tenure is shorter. Yes, the amount of the monthly payment will be higher, but you will be able to reduce your payment outflow.

Never be hasty when applying for a personal loan. Consider all your options. You can achieve considerable savings with a strong credit score, a little research, and the right financial planning.