GUIDE: Get a low interest rate on your loanOn August 6, 2019 by Michael Richardson
There is a nearly linear relationship between the risk the lender assumes and the interest rate you can expect to get on a loan. The more risk the lender takes on by lending you money, the higher a return the lender will require to lend you this money – which ultimately means that the interest rate on your loan will be higher. It has nothing to do with luck or coincidence what interest rate you are offered.
The lender bases the risk he assumes by looking at how solid your financial situation is, as well as the documentation you can show him about various matters that affect your ability to repay the loan.
Of these two elements that the lender is looking at, the latter is the easiest thing to do as a borrower – the documentation. After all, even though the two things are interconnected, improving your financial situation in the form of increased availability is more difficult than documenting how your finances are related.
By having an overview of how your own private finances are connected, you give the impression to the lender that you are responsible and prepared. It can help make the lender more secure and thus ultimately reduce the risk to him by offering you a loan – thus reducing the interest rate you will pay.
Here you get the tips to get a low interest rate on your loan
Gain an overview of your expenses and income
If you have an online bank with budget and division function, this is obvious. If you don’t, I’d recommend getting it. If you do not, you must slavishly review your bank statements and assign each item a category such as: Rent, Car, Insurance, etc. It may be a cumbersome job, but most banks offer such features through their online banking.
Put all your fixed costs together. So all the costs are the same amount each month (or almost the same amount each month). For example, the cost of a mobile phone is usually referred to as a fixed expense, although the item may actually vary slightly in size.
Then add up all costs that cannot be categorized as fixed and take an average of these over 12 months. Then you have an overview of both fixed and variable costs and thus can see how much money you need – for your finances to run around.
Your after-tax income is typically stable over a full year. If it is not, make sure to take an average over the 12 months of the year. Subtract your revenue from your spending to see how close your finances are to being in balance. An important keyword that lenders use is ‘availability amount’ and this exercise can help to clarify the order of availability amount.
Assess which items can be expected to rise and which ones are likely to fall over the next year
Is there anything that can be sorted from? Are there places where it is obvious to save? Making such thoughts sends a positive signal to the lender and can be used as an argument to justify how things look in the future.
Have your last 3 paychecks
Advance statement and annual statement included so the lender can see tangible facts about your income. These documents provide security for the lender.
Don’t say to the lender that you can drastically reduce your consumption
if it really can’t be done. They see through it very quickly! If you want to argue this, make sure you have some concrete points ready that you can reasonably fulfill. For example, you may want to review your insurance policies, downgrade your TV package, or move children from private to public elementary school. So things you want to do that the lender can immediately relate to diminished consumption.
Get acquainted with common loan
Related terms such as; variable versus fixed interest rate, what constitutes a benefit, OPP, principal and loan proceeds, etc. Elements like these, you can read more about here.
Show that you are in control
Don’t come in with a lazy attitude. Ask questions and stay tuned. Although many do not make use of it, it is just as legitimate to negotiate in a loan situation as it is in a hawker market. The price of a loan is rarely fixed from the start, so there is ample opportunity to influence your situation favorably if you challenge the lender. If there are words or schemes you don’t understand – say it! Ask the lender to explain it in simpler terms so that you are sure what you might like. says yes to. It is no shame not to know what SDO (Special Covered Bonds) is, but since it can affect your loan agreement, it is important that you ask. Failure to do so will put you in a worse position in the conversation because a loan is set up based on terms you do not understand. So be critical!
You do not have to put your signature on a loan agreement for the first meeting
Often after a long meeting you may need time to think through all the inputs you have been given. Say that you will return after you have considered the situation and obtained other offers on the loan.
These tips are great to write behind the ear before you can talk about loans. Having these tips in mind will hopefully help convince the lender that you are well able to repay your loan in a timely manner and that you are a responsible borrower. Because you are!
Good luck with the conversation!