3 ways to counter a high interest rate on your personal loan, Money News
Have you thought about buying a new car, buying a house or financing a wedding recently? Or maybe you would like to have more money or find a way to finance your child’s education. Maybe you even have high credit card debt that you want to pay off as soon as possible.
If you’ve considered any of these, the idea of taking out a personal loan may have crossed your mind. Whatever your reasons, personal loans can be an incredibly useful tool for many people.
However, most people have many questions about the interest rate associated with a personal loan. The most important being: how can I get the lowest possible interest rate?
At first glance, the interest rate from one bank to another does not seem to vary significantly, but make no mistake about it. Consult the table below to see the variation in interest paid with slight changes in the interest rate.
|Amount of the loan||term of the loan||Interest rate||Total interest to be repaid|
|$10,000||60 months||Five years||12.0%||$3,346.40|
|$10,000||60 months||Five years||13.0%||$3651.80|
|$10,000||60 months||Five years||13.5%||$3806.00|
|$10,000||60 months||Five years||13.8%||$3899.00|
As you can see, even a small increase in the interest rate can translate into hundreds of dollars. It is therefore all the more crucial to obtain the most competitive rate possible when you plan to take out your personal loan.
Factors That Influence Personal Loan Interest Rates
Before you search high and low for the best interest rates, we think it’s worth knowing how banks produce this figure and what you can do to get the best rates.
1. Your credit score
Your credit score plays an important, if not the most important, role in determining your personal loan interest rates. If a bank can determine that you are likely to repay your loan on time, they will reward you with a lower interest rate.
The table below summarizes estimated average personal loan interest rates based on VantageScore risk levels, according to Experian. Note that this is only a general guideline, as other factors may affect the interest rates that are ultimately set by your respective lenders.
|Vantage V4 Credit Score||Average interest rate|
|Near the first (601-660)||15.56%|
|Super Prime (781-850)||6.59%|
As you can see, having a subprime credit score means you will pay more than double the interest rate of a “super prime” credit score. Therefore, lowering or maintaining a great credit score is essential to saving money in the long run.
2. Your income
Interest rates on personal loans are heavily influenced by your monthly income. Lenders take into account your monthly income, as well as its stability when calculating the interest rate. If you have a stable source of income, they are more confident that you can repay the loan and will therefore offer you lower interest rates.
On the other hand, a low or unstable income will prevent you from getting the loan you need for your home, renovations or any other personal need, further postponing your life plans.
READ ALSO: Can I take out a personal loan? Answers to the 7 most frequently asked questions
3. Your existing loans and debts
If you have several simultaneous loans in progress, a bank may be reluctant to lend you another sum of money. Repaying many loans at once can be taxing even for the highest earners. As a result, banks may offer you higher than usual interest rates to protect you and themselves.
4. Your relationship with your bank
This one may not surprise some of you, but if you’ve been a long-time customer of your lending institution, they may offer you lower interest rates because of your relationship.
Banks ultimately want to have a working relationship with you. So, if you have been a loyal customer of your bank, be sure to contact them first and get their quote, before moving on to other lenders.
How to counter high interest rates
Now that you have an idea of what goes into determining interest rates, here are some ways to ensure the lowest rate.
1. Explore your options
Regardless of your income or credit score, one of the best ways to guarantee the lowest price is to explore the options available to you.
Contact banks you don’t typically work with or research current rates online for people with a profile similar to yours. Loan matchmakers like Lendela can also help you quickly compare and contrast different offers from different financial institutions.
This way, you can find out the current market normal and determine which interest rate is the most reasonable. You may be able to negotiate with their primary lender based on the rates they find other banks are offering with varying degrees of success.
2. Start building a strong credit score
While it may be too late to establish a relationship with your bank, it’s still not too late to establish a good credit rating, even if your current rating may be below par. In fact, it can even take less than 6 months to raise your credit rating to AA, which is the best possible rating.
One way to do this would be to take out a credit card with minimal spending and low annual fees. Then you can use that card to pay for daily necessities like transportation, groceries, or gas. These are usually small items that you can confidently pay off within a month.
As you will always meet your credit card payments on time, your credit score will increase and banks will offer you a low interest personal loan.
ALSO READ: Pros and cons of personal loans, and 5 things you should never use them for
3. Beware of promotions
When looking for the lowest interest rate, it helps to be on the lookout for promotions the bank may be offering. On special occasions such as Chinese New Year or National Day, banks may offer personal loans at a relaxed interest rate, making this the best time to get one. So if a major holiday is approaching, waiting for a promotional rate may be a good idea.
Another thing to keep in mind are inflation rates. Interest rates and inflation rates are closely related in economics. Indeed, interest rates are usually used to manage inflation by the central bank as a monetary policy tool (for Singapore, the MAS is the central bank).
A regular financial institution that lends a personal loan will use inflation rates as a rough indicator of the interest rate. The general rule is that when inflation rises, interest rates are likely to rise as well. You can then decide the optimal time to take out a personal loan based on the current trend in inflation rates.
How Debt Can Ruin Your Future
Many Singaporeans run into debt from time to time. However, high interest rate debt will often serve to cripple your financial health, if it is not repaid promptly or restructured into low interest rate debt. Over time, the constant threat of paying off debt will increase your stress and even cause tension with your loved ones.
In some cases, out of desperation, people may resort to illegal pawnbrokers, who will not hesitate to create problems for your family or your property if you cannot pay their exorbitant interest rates. Not having the money to qualify for loans will also set your future life plans (whether it’s a wedding, your deposit for an apartment, or a family car) years or even decades. .
It’s one of the many reasons we encourage you to get as low an interest rate as possible on your personal loan. Make sure you can repay your loans on time, as the cost of extending or defaulting on a loan can be high.
Overall, doing your research, taking steps to improve your credit score, and being patient are some of the things you can do to get the lowest possible interest rate on your personal loan.
However, if you already have high interest loans, knowing how to restructure your debt with other low interest loans will reduce the amount of interest you pay per month. Debt can have adverse effects on your retirement and your well-being. Therefore, getting a lower interest rate than what you currently have is certainly essential to your financial future.
This article first appeared in ValueChampion.