by Susan Paige
Are you in the process of applying for a personal loan?
You’re certainly not alone. The amount of personal debt in the United States has been on the rise, growing from $72 billion in 2015 to over $143 billion in 2019. And with the COVID-19 crisis putting more people out of work and throwing them into financial dilemmas, there’s no doubt more people are on a borrowing spree.
Regardless of the reason you’re borrowing, one thing is clear: you want to get the lowest loan rate possible. How do you pull this off?
Continue reading for a couple of proven tips for getting the best loan rates.
Your Credit Score Matters
Are you one of the 40 percent of credit-active Americans who don’t know their credit score?
If yes, you probably don’t know that lenders look at your credit when you apply for a loan. If your credit score is below their requirements, either of these two things will happen: your application will be denied or it will be approved but at a higher interest rate.
As such, it’s incredibly important that you know your credit score before going in for a personal loan. Anything below 579 is generally considered bad credit and is bound to make your quest to get favorable personal loan rates super difficult.
If your credit is bad or poor, there are steps you can take to rebuild it quickly before applying for the loans. A good place to start is getting a copy of your credit report and combing through it for errors.
Credit reports errors are very common, with 1 in 5 Americans having experienced them. An error, such as an incorrect account balance, can have a big impact on your credit rating. Getting it fixed can be all you need to do to add some points to your score, and maybe move out of the red zone.
With better credit, you can confidently start applying for loans knowing there’s a good chance you’ll get a lower rate.
Prepare Your Proof of Income
While your credit will tell a lender of your creditworthiness, it won’t indicate whether you currently have the ability to repay the loan amount you’re looking to borrow.
This is where proof of income comes in handy.
Most lenders will ask you to provide your paystubs if you’re formally employed. And if you’re self-employed, you’ll provide your business’ bank statements. Other documents that can suffice as adequate proof of employment include social security checks and the latest copies of your federal tax return.
If you’ve got none of these, what do you do?
Proof of income is super important when you’re looking to apply for an unsecured loan. The lender banks on the fact that you’ll be able to repay your loan from your regular income.
But there are also secured loans. If you own a house, a car, or any other valuable asset with a title, you can use it as collateral to get a loan. If you default on the loan, the lender has the right to repossess the asset you put down as collateral.
That being said, unsecured loans tend to have higher interest rates than secured loans. This is because, on unsecured loans, lenders take on more risk. If a borrower defaults on the loan, there’s little lenders can do to recoup the money.
But with secured loans, lenders will come for the collateral, sell it, and recoup their money.
Understand How Various Lenders Price Their Loans
Traditional lending institutions, such as community banks and credit unions, typically offer the lowest rates. These institutions are regulated by the Federal Reserve, which sets interest rates in the U.S.
There are also informal lenders, such as payday loan companies and private money merchants. These lenders have a reputation for charging high interest rates on their loans. The average annual percentage rate on a payday loan, for example, is 400 percent!
When you have a basic understanding of how various lenders price their loans, it’s easy to stay away from expensive lenders. It’s clear that if you want the lowest loan rate, you should go to a local bank or credit union. Doing business with a money merchant or payday loan company is a sure way to get a high-interest loan.
Shop Around
What do you do when you want to get the best deal on an item you want to buy? Shop around and compare prices.
The same applies when you’re looking to get the lowest rate on a loan.
Just because you already know that banks offer the lowest interest doesn’t mean you settle for your local bank. Even among these lenders, there’s a difference in their interest rates. Shopping around enables you to find the one offering the lowest rate of the bunch.
Does this mean you should walk from lender to lender comparing loan rates and other terms and conditions?
In the past, you would have had no choice. But in the digital age, you don’t have to worry about that. You can conduct your research online, compare rates, and even review the reputation of a specific lender.
For example, if you’ve narrowed down your search to a lender like https://icash.ca/, you can look up online reviews and see what its past and current customers are saying. If the reviews are positive and the rate is good, you can then resolve to proceed with your application.
Get the Lowest Loan Rate
Getting the lowest loan rate can seem like a big challenge. However, when you know your way around the lending market, the challenge becomes an easy one. In addition to this, ensure your credit is in a good state before approaching a lender.
All the best and keep reading our blog for more money tips and insights.
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