Whenever you borrow money, you pay a price for the service. This price is interest. The fee you are charged for borrowing money is based on how likely you are to repay the loan. If you want a lower interest rate (and a lower overall cost for your loan), here are three things you can do:
Step 1: Improve Your Credit Score
One of the best things you can do to lower your interest rate is to improve your credit score. Most lenders look at your score to get a quick idea of how reliable you are likely to be as a borrower. A good credit score means a lower interest rate.
It's possible to improve your credit score by making an effort to pay your other obligations on time and in full, as well as by paying down your debt. It can take a few months to see a substantial increase in your credit score, so it makes sense to start before you need to apply for your loan.
Step 2: Offer a Bigger Down Payment
Many lenders consider that someone with more “skin in the game” is likely to make on-time payments. On top of that, the more you put down up front, whether it’s a home or a car, the less you need to borrow. Therefore, if you offer a bigger down payment, you are more likely to see a lower interest rate.
Saving up for a bigger down payment might require you to take on more up front, but in the long run the interest savings can add up.
The longer you have your loan, the more likely you are to start missing payments — or even to default. Lenders make up for this by charging a higher interest rate. If you agree to a shorter loan term, you can save money in interest.
However, a shorter loan term also usually means a higher monthly payment. Even though you will be paying more each month, the long-term benefit can be greater, since you will pay off the loan faster, and your lower interest rate will save you money.
Consider your options, and if you can comfortably afford the higher payments, it might make sense to agree to a shorter loan term.
If you want to save money on interest, it makes sense to plan ahead. The best interest rates are offered to those who have good credit, and make bigger down payments while agreeing to shorter loan terms. However, just adding one of these tactics to your borrowing plan can reduce your interest rate.