If you're searching for a loan with a low-interest rate, you may be wondering if cheap loans even exist. There’s almost always a cost to borrow money, but you can manage the costs and improve your chances as a borrower.
Why Good Credit Is the Key to Landing Cheap Loans
The best way to get a cheap loan is to have good credit. If lenders believe that you’re likely to repay as agreed—on time and at the predetermined amount—they’ll offer better rates and more options. This can seem unfair if your credit has taken a hit because you were struggling financially at one point. Over time, you can improve your credit once more by working steadily and being responsible.
Some loans, such as student loans and first-time homebuyer programs, are extremely cheap loans. Under subsidized loan programs, somebody else pays the interest for you and reduces your total borrowing cost. Use them when you can.
Switching to Cheaper Loans
When you already have loans outstanding, you may be able to save money by switching to a better loan structure. It may be possible to refinance or consolidate one or several loans with cheaper interest rate loans. The tradeoff? You might pay more in interest over your loan's lifetime (even with a lower interest rate), and you could put your home or other pledged collateral at risk. Consider the risks of cheap loans before refinancing.
In addition, beware of money traps that appear to be cheap loans. For example, "no closing cost" loans always have a cost. You just can’t always see the costs at first.
You may be able to turn existing expensive loans into cheap loans without refinancing. If you’re in financial trouble, your lender might change the terms of your loan to keep you from going under.
How do you know which loans are cheap loans? Start with the loan’s annual percentage rate (APR). This number should include costs above and beyond the interest rate you pay, such as closing costs and other fees. While APR is a tool for finding cheap loans, you can’t just pick the lowest APR. Avoid getting the wrong loan by comparing APR.
Peer-to-peer lending may help you find cheap loans. If you can’t get a good deal at the bank, try asking other individuals. Your chances are a little better because you don’t have to pay for the advertising and overhead of large banks, and a person may just want to help. Friends and family often offer cheap loans, but you have to be careful.