If you take out a loan, the interest rate is one of the most important factors that determines the actual cost of things. Whether you are looking to buy a car or finance a vacation home, the interest rate will help you determine how much you will pay monthly on your transaction. Along with the purchase price and the loan duration, the interest rate is an important factor in the monthly payment and the total amount you will ultimately pay for the item. High interest rates mean higher monthly payments and potentially thousands of additional dollars in interest costs. Low interest rates allow you to borrow money at a lower cost, ensuring a lower monthly payment and lower costs over the life of the loan.
Keep Your Credit Score in Good Shape
The interest rates on your loan depend on the Federal Reserve, market forces, or a combination of both. When the economy is doing well, interest rates usually rise. When the economy is doing poorly, such as during a recession, rates fall. These factors are all beyond your control, but your credit score is an important factor in determining the interest rate that you can control.
Depending on the lender’s credit scoring model, your credit score should be at least 740 or 781 to be considered a very good credit score. A higher score will help you qualify for a better interest rate. If you haven’t done so yet, you can improve your score by paying all your bills on time, disputing any errors on your report, keeping your balances low on all your credit cards, and working to pay off all your debts. It may take months, if not years, to rebuild your credit (or establish credit for the first time).
Give yourself enough time in advance to improve your score before applying for a loan. Get your credit reports several months ahead of time (for free), and if time is running out, ask for a rapid reassessment.
Shop Around
What one lender offers you may vary significantly from what another lender can offer. For example, credit unions can usually provide lower rates than large national banks. Also, if you have been doing business with the same place for a while, get a quote from that institution first. Sometimes, banks offer lower rates to long-term customers as a way to say “thank you” for doing business with them and to keep good customers from looking elsewhere.
Shopping around for loans can negatively impact your credit score because each time you apply for a loan, your credit score is affected. To minimize damage, do all of your shopping within a short time frame. Mortgage companies and auto loan lenders understand that customers will need several different offers – that’s what smart borrowers do. As a result, credit scoring models consider time periods in which you are shopping; as long as you’re applying for a home loan or an auto loan, your credit score will only be impacted once during that period, regardless of how many inquiries you receive.
How long do you have to shop around without accumulating inquiries? It depends on the credit scoring model, but you can count on having at least two weeks, possibly up to 45 days (especially for home loans).
Note: This only applies to home and auto loans. Credit card applications and other loans will affect your credit score each time you apply.
GetThe Appropriate Term
When obtaining a loan, long-term loans generally have lower interest rates compared to short-term loans. However, keep in mind that a longer loan term means it will take you longer to repay the loan. In the end, you may pay a larger amount of money in interest compared to a short-term loan with a high interest rate.
The opposite is often true for accounts where you can earn money – like a Certificate of Deposit (CD). When one-year CD rates are at 1.20% APY, you might see five-year CD rates at 2.25% APY. If you can leave your money tied up for a longer period, you’ll earn more on long-term CDs.
It’s always best to pay off debt as soon as possible, so if you can afford a higher monthly payment, opt for the shorter loan term. Want to see the numbers for yourself? Try out some scenarios on our loan calculator.
By keeping your credit rating in good shape, shopping around, and getting the right term for your loan, you’re putting yourself in the best possible position to secure the best interest rate on your next loan.
Source: https://www.thebalancemoney.com/great-rate-next-loan-315608
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