How to Lower the Interest Rate on a Personal Loan

So why do some applicants enjoy more competitive interest rates on the personal loans they apply for than others? This is a question that has long mystified many borrowers, usually those who repay loans at higher interest rate than other borrowers they know.

Historically speaking

Your credit history is above all else, the number one contributing factor to the interest rate on the loans you apply for so don’t overlook the importance of a good credit history and rating. Your repayment history – your history of making repayments on credit cards and loans, is the major contributor to this, but there’s more involved, seeing that your credit and loan applications are also responsible for the interest rate that the bank or lender offers you when applying for a personal loan.

How many credit and loan applications have you made and how many times have you been turned down by a bank or lender? This contributes majorly to the interest rate that you borrow at, but not only that, it also affects the willingness of the banker to loan you money in the first place and bankers aren’t in the habit, or the business for that matter, of taking risks.

By 401(K) 2012 under CC BY-SA 2.0

Critical criteria

You have to prove to the banker that you don’t present a risk and that you’re going to make your repayments on time. With regard to small business owners and loan applications, the 6 C’s of credit aren’t to be overlooked – capacity, capital, cash flow, character, collateral and conditions. Take a look at your ability to meet these criteria before applying, and remember that if you’re unable to meet these criteria your application stands a good chance of being turned down, and your credit history will take a turn for the worse.

Individual applicants traditionally don’t have as much to prove to bankers when applying for a loan as does a small business owner, though that isn’t to say that the banker won’t be scrutinising their credit history when applying for a loan, plus they too have things to prove when applying, most notably – that their financial responsibilities won’t prove to be a problem, that they have the ability to make loan repayments and that there’s little or no chance of them defaulting.

Raise your credit score, lower the interest rate

If you’re to enjoy a lower interest rate when applying for loans, or receive approval for a personal loan in the first place, how should you go about this?

It’s possible to improve your credit score so as to enjoy higher chances of approval and lower interest rates when applying for loans and the best way to go about doing so is to make the most of what you have. Don’t make the mistake of applying for more credit or another loan until you’re ready, should you be turned down for a loan this won’t do your credit score any favours; wait until it’s improved before applying again.

If you have a credit card or any outstanding loans, work with these to improve your credit score by making your repayments on time. If you feel you’re ready to apply for a small loan like a cash loan, do so, you’ll find that successfully applying for a small loan like this and making your repayments on time improves your credit rating and you’ll be able to apply for larger amounts with more competitive interest rates in the future. This is an effective way to improve your credit rating and with it; improve your loan approval chances and the interest rate that’s applied to the loans you apply for.

By Boris Dzhingarov – Follow him on Google+