How much of a difference do a couple of percentage points make? In the case of a loan, 2% can amount to literally hundreds—or thousands—of dollars, depending upon the size of the loan and the length of the agreement. In borrowing $10,000 over five years, for example, you’d save more than $500 by qualifying for a 3% rate as opposed to 5%.
This can add up. So you want to sign up for the lowest interest rates available, while reducing terms on existing loans if you can. For insights as to how to do this, we’re providing the following recommendations in two parts—one for loans in general (whether via mortgages, credit cards or other options) and another for specific types of loans.
Part I: General loans
Build a ‘checklist.’ When assessing an applicant for an interest rate, there are certain ‘checklist’-type qualities that lenders evaluate. These cover obvious factors, such as your loan/bill payment history, your income and the length of time you’ve held your current job. But there are not-so-obvious personal traits/behaviors to consider. “These may include moving from one address to another over a short period of time, which could indicate a degree of instability,” says Kevin Haney, a former sales director for the credit bureau, Experian, who now runs SavvyonCredit.com, a credit information/education site. “You also want to be consistent when using your first and last name when applying for credit. A consistent identity allows the bureaus to present all of your positive payment history confidently on a single consumer report.”
Audit yourself. Meaning, give yourself a debt audit to determine your Debt-to-Income (DTI) ratio. Simply stated, this ratio calculates the amount of debt you have to pay each month as a percentage of your overall monthly income. It’s considered nearly as significant as your credit score for the purposes of qualifying for a loan or extension of credit, according to Bankrate.com, which provides a DTI calculator here.
“When you know your DTI, you can then seek to improve it to qualify for a lower interest rate on your existing debt,” says Gregg Schoenberg, chairman of Peerform, a New York-based peer-to-peer lending company. “By paying down the highest pieces of debt faster, you’ll lower this ratio. Then, you can just ask your lender for a rate reduction. The worst that can happen is that your request is denied. But if your financial profile is getting stronger, you might be pleasantly surprised.”
Make a call. Yes, getting a great rate may only require calling your lender and asking for an interest reduction. Before picking up the phone, you should gather information that will put you in the best position to bargain. You’ll make a better case for yourself, for example, if you’ve had the loan for a while, because lenders value loyal customers. You’ll also want to see which other companies will offer you a lower rate.
“It’s amazing what the power of a phone call can do,” says Jeremy Shipp, president of Richmond, Va.-based Harbor Wealth Advisors. “The market is competitive, and companies are fighting harder to retain good, paying customers. It’s key to do your homework in advance. Business is all about negotiating. So if you have a slightly better offer when you make this call, then you have an advantage.”
And if the company says ‘no,’ you still win. “You already have a more appealing offer in your back pocket,” Shipp says, “so you can transfer your balance to the competitor.” (Shipp recommends, however, that you read the fine print before doing so, especially when it comes to the alternative lender’s terms and transfer fees, as well as any charges that may apply later.)
Go peer-to-peer. Peer-to-peer lending (P2PL) has emerged as a non-traditional way to get a loan, allowing applicants to borrow from an individual instead of a traditional financial institution. Generally, the approval process is easier, and you’ll avoid charges such as application and processing fees while bargaining for a lower interest rate. (Lenders benefit through these sites because they still earn more interest than they would on a traditional bank savings account or certificate of deposit.) “If you have a personal relationship with another member or investor, you’ll improve your chances of getting a good rate,” Haney says.
Part II: Specific loan types
Mortgage. There’s always refinancing, which is a viable option if you expect to stay in the home for at least the amount of time that the reduction in the monthly mortgage payment will exceed closing/refinancing costs.
If you’re attempting to buy a new home, it’s best to prepare well in advance—for even a year or more. For starters, you should set aside as much as possible from your regular paycheck for a down payment. At the same time, you can work on raising your credit score while building savings. “You need to ‘massage’ your homebuyer profile so you are extremely well-qualified,” says mortgage advisor Casey Fleming, who is author of “The Loan Guide: How to Get the Best Possible Mortgage.” “The best rates go to those with at least a 20% down payment, a credit score over 740, at least six months’ worth of housing expenses in the bank after closing and little or no debt.”
Car loans. Bankrate.com suggests shopping the loan separately from the car purchase through credit unions, banks and other institutions. Online banks in particular will provide favorable terms. With an agreement in hand, you can then see if the dealership is willing to match—or beat—an outside party’s rate.
Student loans. Go to government-sponsored loans first. “They often have better rates and repayment terms,” Haney says. Those in public-service fields—including educators—can qualify for favorable repayment options. This includes the Teacher Loan Forgiveness Program, which may result in the forgiveness of as much as $17,500 of a loan. In addition, you could qualify for an Income-Based Repayment (IBR) plan, which sets borrowers’ monthly payments at a fixed percentage of their income.