How to negotiate a lower interest rate on loans?


4 March 2023

How to negotiate a lower interest rate on loans?

Before sanctioning a loan to somebody, banks (or other lenders) consider many factors such as your loan amount, your repayment capacity, your credit score, etc. Given all the constraints, you should make sure you meet all the requirements and try to get a lower interest rate on loans. Here are a few ways that could help you achieve that.

Maintain a good credit score

A credit score of 750 and more is going to give you a better chance to get a lower interest rate on loans. This could be done gradually by clearing your bills, debts, and dues on time, every month. Maintaining your credit utilization ratio within the 30 percent limit can also be an added advantage. Along with this, checking your CIBIL Report for mistakes, maintaining a healthy credit mix of both secured and unsecured loans, etc., too can help you get a lower interest rate on loans. You should also monitor your guaranteed or co-signed loan account to ensure timely payments, as delayed or missed payments can affect your credit score along with that of your co-signer.

Maintain a good repayment history

Instead of paying just the minimum payment amount on your credit card every month, try to pay the bill amount in full and clear off your debts. You should also follow up on other EMI payments and other loans. With a good EMI repayment history, you will have a better chance of negotiating a lower interest rate on loans with the lender.

Compare interest rates, look out for seasonal offers

Based on your requirement and eligibility, visiting an online financial marketplace can help you compare and choose the best option for you among various lenders. You can also check with your current lender if they are offering any offers during the festival season or if they have any scheme that provides a lower interest rate on loans. It might be beneficial for you to avail of a loan from your lender during such times. 

Check the interest calculation method

Despite the lender providing you with a lower interest rate on loans, you might actually end up paying a higher interest amount at the end of the loan tenure. This is because of the method of calculating the interest, and it differs for every lender. You might be provided with a loan at a flat interest rate, where the payment of interest is calculated on the full loan amount throughout its tenure, or at a reducing interest rate, where the payment of interest is calculated on the outstanding principal, where EMIs gradually reduce the principal amount. Therefore, availing of a personal loan at a “reducing” rate could provide you with a lower interest rate on loans, than a “flat” rate.

Credibility of employer

People who are working for reputed or multinational companies will be more eligible to get favourable deals. Their employers’ ability to provide a steady job is higher and therefore the lenders come to a conclusion that the borrower is more likely to have a  stable income to repay the loan dues on time. Thus, it will be easier to get a lower interest rate on loans.

Your employment history

Having a good job, residential stability, and maintaining good FOIR (Fixed Obligation to Income Ratio)  will help you in building a good credit score which partly impacts the interest rates too. FOIR is the debt-to-income ratio and it is the most commonly used parameter by lenders to determine the loan eligibility of an applicant. Few banks require you to have an employment history of at least two years, including a minimum of one year with your current employer. People who are employed with state or central government organizations are looked at favourably by lending institutions and have a higher chance of getting a lower interest rate on loans.

Ask for the same rate new customers get

If you are a person with a good credit history and no missed repayments, you can contact your lender and ask them about the interest rate offered to new customers, and get the same interest rate for your loan as well. Few lenders might be willing to negotiate to retain their existing customers.

Make sure you’re the ideal borrower

Give yourself the best chance to negotiate for a lower interest rate on loans and be the borrower banks love to lend to. Lenders generally look for a number of things before calculating your interest rate. They are:

  • A low LVR. Loan-to-Value (LVR) is the ratio of the first mortgage line, as a percentage of the total appraised value of the real property- (A higher LVR over 80% may hinder your negotiations)
  • Good credit score and no missed repayments
  • Steady employment

One should always check the service terms offered by various lenders before zeroing in on any lender. Make sure you base your decision not only on the interest rate offered but also on loan tenure, fees, loan amount, etc. You might not get a good deal if you have already taken too many loans. Your application might even get rejected if your CIBIL score is below 700. With the help of a Salary Card, you can now maintain your credit score, and be eligible to get a lower interest rate on loans.   

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