The interest rate you pay on the loan is the single biggest determinant of how much you pay over the life of the loan. Late fees and roll-over or refinance fees are secondary, though a higher interest rate on the loan could force you to pay those fees because you can’t afford the monthly payments. The question for most consumers is: how can I find the online personal loan with the lowest rates?
Know Your Risk Profile and How Lenders Respond to It
Your credit score is probably the most popular borrower risk profile measurement. The higher your score, the lower the interest rate lenders offer. The inverse is also true. Unfortunately, many online lenders use automated underwriting. If your credit score is too low, they’ll reject your application. This cut-off point varies from lender to lender. It may be in the fine print. Don’t bother applying if they’re up front about rejecting your application on that basis.
A different issue is how they gauge the risk of loaning money to you, and this can require some research. For example, lenders use different thresholds to separate bad credit from fair credit or fair credit from good credit. You might be offered a lower interest rate at a different lender because your credit score is in the “better” category with that lender than others. You could use online lending portals that let you compare lenders to find out what credit score they use as this cut-off point.
We shouldn’t need to say this, but the best way to find a loan with lowest personal loan rates is to shop around. Too many people apply with their current lender for a loan and assume that they’re getting the best rates due to their existing business relationship.
Shopping around has a number of benefits. You may find a lender with a much lower interest rate. You’ll learn what most lenders consider a reasonable interest rate for a client with your credit. You’ll understand what terms and conditions are standard and which are out of the ordinary, be it an application fee or a high late fee. And if you decide to go back to your current bank or credit union, you can use that information to argue for a lower interest rate. This doesn’t mean you’ll get it, but you have no negotiating room if you don’t like what they offer and have no other choices. And if you know you have options, you have the ability to walk away from the negotiating table and go somewhere else.
If you’re going to be applying for a loan with a given lender, go ahead and shop around, too. You may find that they offer a lower interest rate to consumers going through an online portal than what they offer you when you apply via their home page.
Know How to Lower Your Risk Profile
The interest rate lenders charge is partially profit, but it also has to offset the losses caused by those who don’t repay their loan on time or in full. They will try to mitigate the risk by charging a higher interest rate to those who are higher risk. You could get a lower interest rate by lowering your risk profile. There are a number of ways of doing this, though many aren’t an option if you’re staring at the online loan application right now.
For example, ensuring that your bills are paid on time and in full for several months will result in a lower interest rate quote on a car loan or mortgage than if you were late last month. Making debt repayment a priority so that your debt-to-income ratio is lower could result in a lower interest rate offered by auto and mortgage lenders, too. But what can you do when you’re about to apply for an online loan right now?
Lenders sometimes give you a lower interest rate if you can improve the odds they’ll be paid on time. For example, you might get a lower interest rate if they can automatically withdraw the monthly payment from a verified checking account instead of trusting you to send them the payment. A side benefit of automating payments is that you won’t be hit with late fees or other penalties, as long as there is enough money in the account to cover the draft.
Another way to lower your risk profile is to get a co-signer. That is someone who promises to pay the bill if you don’t or can’t pay it. Note that it is illegal to add someone’s name and contact information to a loan as a co-signer without their permission. And there is relatively little benefit to adding someone as a co-signer if they have bad credit, too.
On the other hand, there are mistakes you may make that can increase your risk profile right before you apply for a loan. For example, applying for several loans in a short time period can raise red flags with lenders. They may not know how much you asked for, but they will see that you’ve had a lot of hits on your credit report. You could get rejected if you accidentally submit multiple loan requests to the same lender. This could happen simply by hitting submit several times instead of waiting for the application to go through and/or waiting for them to finish processing it.
Don’t Be Afraid to Refinance
Refinancing loans can lower your payments when you qualify for a lower interest rate. Debt consolidation with a new lender can result in both a lower interest rate and a lower risk profile. For example, if you consolidate four loans into a new loan at a slightly lower (average) interest rate, you won’t miss one of the four payments and get hit with a late fee. If you’re making that one payment on time every month, your risk profile goes up. And if the new payment is lower than the total payments you were making, you have more financial margin every month. We’re not saying that you should refinance your loans and then use the extra 100 dollars a month to buy something else on credit. However, refinancing existing debts could end up improving your risk profile, saving you money, and eventually making you a better prospective customer to future lenders.