How to Get the Best Rate on a Loan
If you need money for the short or long term, it’s important to remember that not all loans are created equal – and the price you pay for that money (in fees and interest) may vary dramatically.
What do you need?
Before shopping around for loans, you should know how much money you’re looking to borrow! You’ll want to make sure you’re only borrowing what you need. If you’re clear on how much you actually need, you won’t feel as tempted to accept an offer that is beyond your needs.
I learned this the hard way. When I was in college, I was approved for a loan that was much larger than I needed to pay my expenses. The idea of all that extra money was so enticing that I didn’t think about the long-term impacts of taking more money than I needed. But those loans haunted me during repayment. Ultimately, I had to remember the “no shame zone” and forgive myself.
Before you apply for a loan, consider how much time you’ll need to repay the loan as well as well as what your repayment plan will be.
What’s your credit score?
When you apply for a loan, the lender will run a credit check. But if you know your score ahead of time, you’ll know what to expect going in to the conversation. If you know that your credit score is low, consider improving your credit before applying so that you can get a lower interest rate. This might be tough if you need the money soon, but talk to a reputable credit counselor to learn about your options.
If your credit score isn’t as high as you’d like it to be, you could ask someone to cosign the loan with you to get a better rate. Check that the person cosigning your loan has a better credit score than yours, and make sure you don’t make any late payments, because that will harm your cosigner.
What are your options?
I recommend getting multiple loan offers so that you can compare the terms and make sure you’re getting the best deal. But beware! Shopping around for a loan can impact your credit. The good news is that FICO Scores understand that people may request loans from multiple companies even if they’re only looking for one. FICO will ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring.
Once you have multiple options, evaluate them based on the terms, interest rates, payments, and the total interest that you’ll pay over the course of the loan. Many lenders will try to get you to focus on the payment. That is certainly a factor you should consider, but it’s not the most important factor.
Where are your limits?
Be honest with yourself. If you don’t have a budget already, work out how you will handle the payments and make sure you know how you’ll fit this new debt into your financial plan.
Saundra Davis is a nationally recognized financial coach and educator. Her experience in the U.S. Navy, where she made every money mistake possible, and her 20 years serving community-based organizations led her to the reality that the best way to help people find a path out of poverty is to help them become their own financial expert.