Updated: Mar 18, 2021
When you’re getting ready to apply for a loan, finding one with a low-interest rate can save you a lot of money. A good interest rate can help keep your monthly payments down and reduce the amount you’ll pay over the life of the loan.
Whether you’re looking for a personal loan, mortgage, or car loan, here’s how to get the best rate possible.
Get Your Credit Loan-Ready
The first step to scoring a low-interest rate is checking your credit report and score—and doing what you can to improve your score, if necessary. Lenders use your credit score and credit history to help decide whether to approve your application and to set your loan’s interest rate and terms. In the months leading up to applying for a loan, it’s important to check your credit score and report regularly.
You can check your credit report from all three credit bureaus (Experian, TransUnion, and Equifax) for free at AnnualCreditReport.com. Several sources may offer free credit scores, including your bank, credit card issuer, and Experian.
Lenders typically reserve their best interest rates for applicants with good or better credit scores (670 or above on the FICO Score scale)—but the higher your score, the better your chances for a low rate. If your credit score could use some work, here’s how to improve it:
Bring any past-due payments up to date.
Going forward, make all payments on or before the due date.
Pay down credit card balances to lower your credit utilization. (But avoid closing credit card accounts; that can hurt your scores.)
Refrain from making any big purchases or applying for new credit.
Correct any mistakes found on your credit reports by disputing them with the appropriate credit reporting agency.
Get credit for on-time utility, phone, and streaming service payments. With Experian Boost, you may be able to instantly raise your credit score by adding these payments to your Experian credit report.
Regardless of the type of loan you’re seeking, don’t go with the first lender you contact. Finding the best interest rate is important, but there are also terms and fees to consider. If you can get prequalified or preapproved, you’ll have a better idea of the interest rate range you can expect and the loan’s total cost. Also, depending on the type of loan, online lenders and credit unions may offer more competitive rates.
Sometimes, speaking to the lender live can give you a good idea of how helpful they will be throughout the application process. You want to make sure the lender is presenting you with all possible options. Some lenders may even offer advice on how you can get a better interest rate. By shopping around, you’ll be better informed when negotiating the terms of a loan.
Provide a Bigger Down Payment
When making a large purchase, such as a car or home, you can reduce the amount of money you need to borrow by putting down a larger down payment. A smaller loan reduces risk to the lender and could translate into a lower interest rate. A larger down payment and a lower interest rate also mean your monthly payments will be smaller than they would have been had you not put down as much money. Having smaller payments may enable you to pay off the loan quicker or accrue more equity in the property when purchasing a house. If you can take the time to save more for a down payment, it could pay off.
The Bottom Line
Getting the best loan interest rate and terms for a house, car or other major purchase involves a few key actions you can start on today. Take steps to boost your credit score, then shop around and try to put down a larger down payment for the best loan possible.
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Maria Valdez Haubrich is the Executive Editor of SmallBizDaily.com where she is responsible for all web content. Previously she was the Executive Editor at Entrepreneur Magazine, where she worked for more than 20 years.