Can You Negotiate the Interest Rate on a Personal Loan?
People commonly haggle when they’re making a purchase, big or small. Whether you were buying a new car or buying something at the flea market, you’ve probably haggled before.
Given that personal loans can involve enough money to buy a car, you might wonder whether you can negotiate the interest rate the loan will charge.
In short, the answer is maybe, depending on where you’re borrowing from.
This article will cover how you can negotiate a lower rate and how you can guarantee a lower rate.
Negotiating a Lower Rate
Some lenders will let you negotiate a lower interest rate on your personal loans, but others will not.
Larger financial institutions
In general, larger, national banks are very strict when it comes to their lending practices.
National banks like Wells Fargo, Chase, and Capital One, will rarely, if ever, be willing to budge on their interest rate or terms.
If you apply for a loan and are approved, the terms of that approval are final. You can’t then ask for a larger loan, different terms, or a lower interest rate.
Credit Unions
Where you might be able to negotiate a lower rate is if you are borrowing from a local credit union or community bank. These institutions are smaller, have fewer strict rules, and have a vested interest in helping the local community.
Since credit unions are not-for-profit organizations, whereas big banks are for-profit organizations, they function with your best interest in mind. If you prove to be a worthy applicant to lend to, they may be willing to lower your interest rate, solely based on the premise of wanting to benefit you.
Some tactics to consider
If you’re trying to haggle your way to a lower interest rate, there are a few things that could help you.
One thing to highlight is your history with the bank or credit union.
If all of your savings and checking accounts are at the bank, and you’ve been working with the bank for years, that relationship might be worth enough to the lender to get them to offer you a lower rate.
It’s even better if you’ve borrowed from the lender in the past since they’ll have first-hand experience with your trustworthiness.
You can also try to leverage other indicators of your financial stability.
If you have a very secure job, prove that to the lender, that might allay their fears that you’ll be laid-off and unable to pay the loan.
Finally, take the time to explain why you need the loan. If you’re using the loan for the right reasons, such as paying off existing debt, the fact that you’re using it to improve your financial life might convince the lender to help you out.
Ask for a Rate Reduction During the Life of the Loan
Another trick to try is to contact your lender after you’ve had the loan for a while.
If you have a five-year loan and have spent the past year making on-time payments, that shows your trustworthiness quite well.
Contact your lender and see if they’d be willing to lower your interest rate. Highlight increases in your credit score and your history of making on-time payments on the loan to maximize your chances of success.
Guaranteed Ways to Get a Lower Rate
If you are unable to negotiate a lower interest rate on your personal loan, these are guaranteed methods for securing a lower rate.
Offer collateral
One way to guarantee a lower interest rate is to get a secured personal loan. Unsecured personal loans have no asset backing them. If you decide not to pay the loan back, the lender has nothing that it can repossess to recoup its losses.
If you opt to get a secured personal loan, you have to offer something of value, such as a car or the balance of a CD, as collateral.
If you fail to make your monthly payments, the lender can repossess the asset you’ve offered as collateral. This reduces the lender’s risk, allowing them to charge less interest.
Increase your income
Another way to lower your interest rate is to increase your income.
The reason a higher income equates to a lower interest rate is easy enough to understand.
Lenders are primarily concerned with whether or not you make payments on the money you’ve borrowed. The more money you make, the easier it is for you to find cash to use to make monthly payments. The less you make, the more likely it is that you have to spend all your money on necessities and not on paying off your loan.
Because people with higher incomes have an easier time paying their monthly bills, they present less risk to lenders. That lets the lenders charge high-earners less interest.
Improve your credit score
You can also reduce your interest rate by improving your credit score, which is probably the most effective way to qualify for a lower rate right from the start.
What is a Credit Score?
Credit scores are the most commonly used measure of how likely a person is to pay off their debts in a timely manner. They are one of the biggest factors in the success of any loan application. They also affect how much interest you’ll pay on the loans you do qualify for.
Your FICO credit score is the one that matters the most -- it is used by more than 90% of major U.S. lenders. It is a number that ranges from 300 to 850. A large portion of that range is considered to be bad credit.
To be able to qualify for a loan, you should have a score in the high 600s at a minimum. To get access to the best loans and the lowest rates, you’ll need a credit score of at least 750.
How is Your Credit Score Calculated?
Your credit score is calculated from five different factors on your credit report. In order of impact on your score, they are:
- Payment history
- Debt burden (amount borrowed and total credit utilization)
- Length of credit history
- Types of credit
- Recent applications for credit
Payment history
Your payment history is simply a history of how often you’ve paid your bills on time. Every time you make a payment on or before the due date, your score will improve.
Every time you miss a payment, your score decreases. The later the payment, the larger the drop in your score.
Even a single missed payment can have a large effect on your score, canceling out months of on-time payments. The best way to improve your credit is to have a long history of on-time payments without ever missing one.
Debt burden (amount borrowed and total credit utilization)
The debt burden portion of your credit score is split into two parts.
The first is just the total amount of money you owe. The more debt you have, the lower your credit score will be since a lender doesn’t want to lend you so much that you cannot make your payments.
The second is the ratio of your balance on your lines of credit, including credit cards, to the total credit limits of those credit lines. The lower the ratio, the better.
Length of credit history
The length of your credit history is another two-part factor of your score.
Part one is simply the amount of time that you’ve had access to credit. The more experience you have with dealing with loans, the better your score will be.
Part two is the average age of your loan accounts. If you open and close credit card accounts all the time, that’s bad for your score. Lenders want to see long-term lending relationships on your credit report.
Types of credit
Being able to handle a credit card is one thing, but lenders want to know how you’ll handle different types of debt. The more different types of debt you’ve had, such as mortgages, credit cards, car loans, and personal loans, the better it is for your score.
Recent applications for credit
Every time you apply for a loan, the lender will request a copy of your credit score from a credit bureau. Credit bureaus take note of these requests, and each “hard pull” on your credit report results in a drop of a couple of points in your score.
The reason for this is that applying for lots of loans in a short period of time is an indicator of financial instability. Records of requests for your credit report expire two years after the request is made, and their effect on your score diminishes just a few months after the request.
If you’re applying for an important loan in the near future, avoid applying for loans or credit cards in the lead-up to your application.
Which Lenders Offer the Lowest Rates?
If you’re looking for lenders that offer low-interest personal loans, consider the following options:
SoFi
SoFi is an incredibly flexible lender, letting you borrow as much as $100,000 for a term of up to 7 years. SoFi charges some of the lowest rates out there, and you can get a lower rate by signing up for automatic payments.
If you lose your job, SoFi also offers unemployment protection. While interest will continue to accrue, you won’t have to make payments while you look for a new job.
Earnest
Earnest offers personal loans that show up in your bank account quickly. It can take as little as two days for a loan to be funded. Plus, Earnest looks at things like your savings patterns, employment history, and career potential to try to offer you a lower rate.
The one downside is that Earnest restricts its personal loans to specific purposes, you can’t just use the cash for anything.
Citizens Bank
Citizens Bank is a great fee-free personal lender. You can borrow as much as $50,000 and take as much as 7 years to pay the loan off. As a bonus, if you already have an account with Citizens Bank, you’ll get a relationship rate discount. Just make sure you meet the minimum annual income to qualify.
