Most of us have at least one standing loan. The rest of us will likely need to get a loan for something sooner or later. Loans serve an important purpose, allowing us to get access to capital for a purchase or investment we otherwise wouldn’t be able to afford. For example, we can use a loan to buy a house with just a down payment, or we can use a loan to fund a new business.
The downside is, of course, that loans are often associated with high interest rates. Each period (usually a year), you’ll pay interest on the principal you borrow from the lender. In many cases, this adds up to be far more than your original principal—especially when you factor in the power of compound interest.
But with a more favorable loan, you can get lower interest rates, favorable terms, and possibly a more amicable lender. The question is, how can you get a better loan?
How to Get a Better Loan
You can get a more favorable loan with these important tips:
1. Shop Around
Perhaps most importantly, be ready to shop around. Too many consumers choose a bank or a lending provider, and remain fixated on the idea of using them. But the reality is that there are hundreds, if not thousands of options you can consider to get your loan. Different providers may have different standards for their borrowers, or may be able to offer different interest rates and terms. You won’t know unless you shop around and see what’s available.
2. Look for Loans Designed for You
Next, try to look for a loan that’s specifically designed for you. For example, if you’re a physician or another medical professional, you may qualify for a physician mortgage loan. With this loan, you may qualify for a larger borrowed amount with a smaller down payment, and no private mortgage insurance (PMI) to worry about. You may also find loans tailored to your needs based on your income level, your profession, your education level, or your background.
3. Improve Your Credit Score
Next, consider working to improve your credit score. Most lenders take your credit score into account when deciding what kind of loan to give you. A higher credit score is an indicator of greater trustworthiness and reliability, so it’s often associated with better terms and lower interest rates. If you have a sufficiently low credit score, you may face a higher interest rate or extra fees—or you might be rejected for the loan outright. You can boost your credit score by paying all your bills on time, decreasing your debt to income ratio (by lowering debt and increasing income), and avoiding opening new lines of credit. Unfortunately, raising a credit score is a process that takes months, or even years, so you may not see results right away.
4. Know The Trade-offs
Most loan options come with trade-offs. You may be able to get a lower interest rate, but that interest rate becomes variable and subject to change based on market conditions. You may be able to secure a loan with a smaller down payment, but at the cost of paying for private mortgage insurance (PMI). Understand these trade-offs, and understand your personal priorities.
5. Get a Co-signer
One easy way to get a more favorable deal on your loan is to work with a co-signer. If your co-signer has a good credit score and financial background, it can instantly make the loan less risky for the bank—you’ll therefore get more favorable terms. The trick is finding someone willing to co-sign.
6. Offer Collateral
You can usually get better terms on your loan by offering some kind of collateral—a possession of value that can be taken by the bank if you fail to pay the loan.
You can also get more favorable terms by negotiating, in many situations. Work with your loan officer to see if you can get a better rate.
Mastering Your Personal Finances
Getting a more favorable loan can be tough, especially if you have a low credit score and you need a loan as soon as possible. The best thing you can do for yourself is to set yourself up for the future. Start working to improve your credit score now, and get your personal finances in place, so you rely less on loans in the future—and so you can capitalize on better rates and terms when you do need a loan.
If you’re new to the world of personal finance, start with baby steps. Create a budget and stick to it. Generate some extra revenue. Start paying down your debts. In time, you’ll be in a much better financial position.