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3 Easy Steps To A Lower Interest Rate

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

large-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.

longer-loan-term 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.

How Interest Rates Affect Your Costs

For people with good credit, the assumption is that the credit card interest rates are a good deal. However, people with bad credit understand that credit card rates, fees, and service charges aren’t as favorable as someone with a better credit history. How much better are the statements between people with good and bad credit? The following chart provides an example of these differences.

credit-card-interest-rates-by-credit-score

Credit Card Payments – How Much Should You Pay?

For many consumers, paying off your credit cards a little at a time is the best strategy to completely pay off debt. But the amount of interest might be a surprise. Even paying twice the minimum payment is a good start, but might not give you the expected pay off and pay down power you are after, especially is the interest rate is high.

One of the key factors to look for in credit card offers is the amount of interest. For example, if the credit card debt is $5,000, with the expected pay-off date 12 months later, then an interest rate of 5 percent will require a monthly payment of $428.04 to guarantee a zero balance in one year’s time. In the end, you will have paid $136.48 in interest charges. Not too shabby, but if your credit isn’t stellar, there is no way your interest rate is set at a paltry 5 percent.

interest-rate-comparison

How Higher Interest Rates Affect Monthly Payments

One of the realities of having bad credit is that when you are able to find a company willing to extend you a credit line, you will pay much higher interest rates for it. A common interest rate for poor credit is 21 percent or more. This makes the same $$5,000 debt look very different. To pay it off in the same 12 months, your payments are now more than $37.00 higher per month at $465.57. But the increase in the monthly payment is minor compared to the total interest charged once the debt is paid in full. With a 21 percent interest rate, the monthly payment is $586.84, $450.36 higher than the good credit interest rate of 5 percent. The grand total is much larger for the same $5,000 of debt. Interest rates don’t stop at 21 percent either. Some credit cards carry interest rates of 29-35% or higher.

Credit Danger For Missed Payments

If your interest rate is closer to the 5 percent, there is no guarantee that it will stay there. One late payment could send your interest rate rocketing up to that 29 percent in just one billing cycle. Here is where it is important to read the fine print that comes with your statement each month. Penalties and interest charges due to mismanagement of your account are clearly spelled out and can be downright scary.

Higher interest rates are not the only measure of a credit card for good credit versus a credit card for bad credit. Always compare associated fees and account charges. Annual fees, add-on charges for cash advances, and other variables are all important to consider before signing up for a new credit card.

In the end, the only real way to be certain your credit card payments will stay low, interest fees remain manageable, and a credit score will improve or stay high is to keep on top of your credit accounts. Paying them off in full each month is best, and being certain to avoid extending your credit beyond your income will keep you sitting pretty


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