You should always take the time to find the cheapest loan you can find. Even a small difference in interest rate can save you a lot of money over the maturity of the loan. Internet has made it easier than ever to find the cheapest rate and we are no longer in the hands of the rates our local bank wants to offer us. Internet give you access to a large selection of different credit providers that are competing for your business. Internet has also made it easy to compare rates from different companies. We are going to talk more about this further down.
When you look at loans and credits online you will see what is commonly referred to as the ‘representative’ rate. The ‘representative’ rate is not necessary the rate you are going to be offered if you apply for the credit. The ‘representative’ rate is the rate that 51% of all applicants get. IE 51% get that rate or better. This also means that 49% of all applicants will be quoted a higher rate.
What rate you will be offered will depend on your salary, your total debt, your credit score and how much you want to borrow. The better credit score you have the lower rates you will be offered. It is therefore always a good idea to try to improve your credit score. You can read more about how to improve your credit score in our article here.
Choosing the right loan
There is a lot you can do to reduce the rate you pay for a loan by making sure you choose the right loan.
Try to never borrow money over a longer time period than you really need. The longer the loan maturity the higher the cost is going to be. By paying of the loan in half the time you will cut the cost more than in half. This is due to the fact that you will reduce your debt quicker if you choose a loan with a short maturity. This means that the amount that you pay interest on will be lower.
Make a budget to see how much money you can afford to pay each month and choose the shortest maturity that you can choose based on the amount you can pay.
If you have a good credit score and only need a smaller loan that you can repay in less than 25 months it might be possible to borrow the money at 0% APR. This is due to the fact that there are credit cards that offer you 25 month interest free. Some money transfer cards make it possible to borrow money interest free for up to 36 months. To keep these loans interest free you have to transfer the debt to a loan account. You will have to pay a small fee to make this transfer.
If you need to borrow the money for more than 36 months you are usually best oft getting a mortgage or a personal loan.
Type of loan
If you want to find a cheap loan it is important that you choose the right type of loan. There are some types of loans that you should always avoid if at all possible. Among these types of loans you find payday loans, SMS loans, certain car loans, pawn shop loans and a number of other types of loans. You can read more about loans you should avoid here.
Always choose a loan that is suitable for your situation. Sometimes a credit card can be the cheapest alternative and other times you will be better of to borrow more on your house or get a personal loan. Compare different types of loans and see which will be cheaper in your unique situation. Always choose a type of loan that allow you to repay the loan early without having to pay any extra fees.
How much do you need to borrow
Consider how much you really need to borrow. Sometimes you can reduce your APR and credit cost a lot if you are able to finance a part of the purchase yourself. By borrowing a smaller amount you might qualify for a lower rate. If this is not possible you should also consider the option of borrowing more money. Sometimes it is possible to reduce your interest rate by borrowing more money. This might seem weird but it is often possible to reduce your total credit cost by borrowing more money. The extra money can be put away and used exclusively to repay the loan. The reason that it can be cheaper to borrow more money is that many credit companies use credit boundaries and if you are near the upper end of one of these boundaries you an be forced to pay a higher rate than what you get if you choose a large loan with a higher total boundary. The APR is in other words sometimes based on how high percentage of the maximal loan allowed by the boundary that you apply for. Not on the total loan amount.
Internet has as earlier mentioned made it very easy to compare interest rate between different companies. There are plenty of different websites devote to helping you find the best cheapest loan possible. It does does not matter where you live, you will always be able to find a loan comparison that focus on your local market. If you live in the US you can visit Moneysupermarket.com, if you live in the Uk you can visit moneysavingexpert.com and if you live in Sweden you can visit boräntor.se.
Websites that allow you to compare interest rates can be very good tools but they are only as helpful as you allow them to be. To get the best result you have to look at what rates you can get using different types of loans, during different maturities and for different amounts. The more energy you put into finding a cheap loan the more likely you are to find the best cheapest loan available to you.
Do not ignore Peer to Peer lending
Peer to Peer lending is still only a very small part of the credit market. It can however be a big mistake to ignore the possibility to borrow money through a Peer to Peer lender such as Zopa and Ratesetter. Both of these companies can be a good alternative for anyone who have a decent credit score. Peer to peer lending is often more flexible with the terms of the loans and can offer make it possible to borrow money at a lower rate than normal credit institutes offer.
Credit comparison websites usually do not offer rates from peer to peer lending companies. You will therefor have to investigate which rate they can offer separately and the compare that to the rates you can find on the rate comparison websites.