1) Improve Your Credit Score
No matter what your credit score is, you will find that rates are on the rise. That does not mean that you can not lower your interest rate by improving your credit rating however.
The fastest way to improve your credit rating is to check for errors. Pull a report from each bureau (you are entitled to one free report a year) and look for errors. If you find any, write the bureau and dispute the information. They then have 30 days to either prove the information true or remove it.
Another way to improve your score quickly is to pay down revolving credit card debt. You have probably heard that you should be using less than 30 percent of your available credit, but the real number is 10 percent. The closer you get to under 10 percent credit utilization, the higher your score will be. If your credit rating is teetering on the edge of good or excellent, it might pay to divert some of your down payment money to paying off credit card debt.
2) Shop Your Interest Rate
Shopping your rate is another great way to lower your interest. Rates will vary among lenders, sometimes substantially. Additionally, while having too many inquiries on your report can harm your score, inquiries made within a few days generally only count as one strike. The credit rating formula takes into account consumer rate shopping.
Get at least three financing quotes before you begin, especially if you are looking for an auto loan. Never trust the dealer finance department because they are notorious for adding points to financing to increase their profits on the back end of a car sale.
3) Bump Your Down Payment
The more money that you put down, the less risky the loan is for a lender. This is for several reasons.
For starters, a larger down payment makes it less likely that you will be “behind on the loan”. People who are not behind and have equity are far less likely to default and that makes your loan less risky.
In addition, a higher down payment improves the loan’s LTV or Loan To Value rate. If a lender needed to repossess some collateral, this would make it easier for them to recoup their money. This also makes your loan less risky.
Try to put down as much as you can, up to the magic number of 20 percent. That will generally get you the best possible rates for your current credit rating.
4) Consider All Of Your Income
The more income that you show, the better. It will lower lender risk by improving your Debt To Income ratio. People do not always list their true income because they only put down the income from their 9 to 5.
Consider all of your income including part time work, child support payments and any bonuses that you regularly get. If you can show a track record of receiving money, you can generally include it in your income.
5) Ask For A Better Rate
You might be surprised what simply asking for a better interest rate can do. Financial institutions do not want to lose your business, especially if you have been a loyal customer.
Once you get that loan offer, simply kick it back and ask for a lower interest rate. You might only score a half percent reduction, but that can be a lot of money over the course of a loan. It can save you hundreds of dollars on a typical car loan and thousands of dollars on a mortgage.
6) Buy Less
The higher your loan is, the riskier it gets. If you find that your interest rate is too high, consider simply buying less. This may very well lower your interest rate and it will certainly lower your payment.
Buying less is also a smarter decision for your finances because it always pays to be frugal. With a lower payment, you will be free to use your money more wisely by channeling more of it into savings and investments.
Before You Sign That Loan Contract
Interest rates are on the rise and no matter what you do, you will pay more in interest than you did a few years ago. That means that no matter how hard you try, you might not be able to secure a loan that is good for you financially. Here are some considerations that you should make before you sign on the dotted line.
Can You Afford The Payment?
Lenders will try to judge whether you can afford a loan before they extend you an offer, but only you really know your finances.
Fit that potential loan payment into your budget and make sure that you have enough money to handle your other commitments and to keep living in the same fashion. If not, consider passing on the loan.
Is The Cost Of Financing Too Great?
Besides the loan payment, you should also be looking at the total cost of the loan. This is the total amount of money that you will pay over the course of the loan. It includes interest, principal payments and loan fees.
Compare the cost of your loan to the amount that you are financing and make sure that the cost is not too high.
Do You Really Need The Loan?
Finally, consider whether you really need the loan. A primary vehicle or mortgage may be necessary, but in times of rising interest, you should carefully consider luxury purchases.
A better option in current times may be to save for your purchase, because rising interest rates do have one benefit. They increase the amount of money that you earn from savings, particularly online savings accounts.