When applying for a loan, one of the most important factors to keep in mind is the interest rate. Low interest rates can significantly reduce the total amount you pay over the life of a loan.
Whether you’re in the market for a car loan, personal loan, equipment loan, or caravan loan, finding ways to secure a lower rate can save you hundreds, even thousands, of dollars.
Keep reading this guide to understand how you can achieve a better interest rate on your loan!
Compare Lenders
Lenders offer different interest rates and terms across the market, so it's worth taking the time to shop around. By comparing your options, you can make a well-informed choice and possibly save thousands in interest over the life of your loan. The lower the rate you achieve, the less you’ll pay overall. However, it’s important to remember that applying for quotes from multiple lenders can result in several hard enquiries on your credit report, which can have a negative impact on your credit score. To avoid this, consider comparing your options through a broker.
Choose a Shorter Loan Term
Lower interest rates are generally offered for shorter loan terms. This is because the loan is paid off more quickly. While a shorter loan term will result in higher monthly payments, you will pay less interest over the life of the loan. Not only that, but a shorter-term loan can also help you establish a positive repayment history, which could make it easier to obtain future loans at favourable rates. While a shorter loan term offers a range of advantages, it is important to ensure you can comfortably manage the higher monthly payments. If the payments are too high, you could experience financial strain and struggle to meet other financial obligations. When choosing a shorter loan term, balance it with your ability to make consistent, on-time payments.
Use a Broker to Negotiate with Lenders
Using a broker can help you negotiate a better interest rate on your loan. This is because brokers have established relationships with the lenders they are accredited with and can leverage this network to negotiate a better interest rate on your behalf. By using a broker for your loan, you could also access lenders that specialise in the type of equipment you are purchasing, resulting in even lower rates.
Refinance Your Loan
If interest rates have dropped since you took out your original loan, refinancing can help lower your rate. Under refinancing, your existing loan is replaced with a new one at a lower rate. This is an effective way to reduce the amount of interest you pay over the life of your loan. Alternatively, if your credit score has improved since you took out your original loan, you could be able to achieve a lower interest rate by applying for refinance.
Credit Score
Your credit score tells a lender everything they need to know about you. It outlines your financial situation by providing lenders with a measure of your financial health and how responsibly you use and manage credit. The higher your credit score, the lower-risk you are as a borrower, and the lower interest rates you will be able to achieve. Maintaining a strong credit score will make lenders more inclined to offer you favourable rates.
If you want to boost your credit score, there are various steps you can take. For example, you can consistently pay your bills on time, only apply for credit when you need it, pay off old debt, reduce the limit on your credit card, consider consolidating your debts, and rectify any errors on your credit report.
Low Expenses
Cutting down on non-essential expenses can help both private and commercial buyers achieve a lower rate on their loan. Having low operational costs or private spending costs can indicate strong financial health to lenders and make them more inclined to offer you a lower interest rate on your loan.
Private buyers in the market for a loan should consider cutting down on discretionary spending by tracking monthly budgets, eliminating unnecessary subscriptions, and prioritising savings. Commercial buyers in the market for a loan should consider reducing overhead costs, monitoring cash flow, and negotiating better deals with suppliers.
Maintain a Low Level of Debt
Credit is money you borrow from a bank or lender. The amount that you borrow is your debt. To achieve lower interest rates on future credit applications, it is important to maintain a low level of debt.
When deciding whether to lend to you, lenders assess your debt-to-income ratio (DTI) to determine your financial health and risk. Your DTI compares the amount of debt you have to your income, and helps lenders understand how much of your income is already committed to repaying debts. By maintaining a healthy DTI, the more likely you are to qualify for loans with lower rates and more flexible terms. In short, the less debt you have, the stronger your borrowing power and the lower your offered interest rates will be.
Closing Thoughts
Securing a lower interest rate on your loan can make a significant difference in the total amount you repay over time. By comparing lenders, opting for a shorter loan term, using a broker, refinancing when possible, and maintaining a strong credit score - you could save big during the lifetime of your loan.
Other factors that can help you achieve a lower interest rate on your loan include having a loan-to-value ratio (LVR) of 80% or less, a steady employment status, and being an owner-occupier. Your LVR is the amount of money you need to borrow to purchase a specific asset, against the value of that asset.
In the end, the key to lowering your interest rate is early preparation. Take the time to explore your options, assess your financial situation, and make informed decisions. A great way to understand your monthly repayment capacity is to use an online loan calculator - a free device that provides repayment estimates based on your entered combination of interest rate, loan term, and loan amount. Check it out online now!
Looking for a personal or commercial loan? Get the lowest interest rates available with JADE Finance.
Our expert brokers are accredited with an extensive panel of 80+ banks and lenders and know exactly where to find the best interest rates for every type of financial situation.
Contact our loan specialists online or by phone today!
