Where to Find Cheap Loans and When to Avoid Them

Learn more about student loans and why credit matters to lenders

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If you're searching for a loan with a low interest rate, you may be wondering if cheap loans even exist. Of course, there’s almost always a cost to borrow money, but you can manage the costs and improve your chances as a borrower.

Use the tips that follow to find out how to score cheap loans and when it might be a good idea to pass them up.

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. However, over time, you can improve your credit once more by working steadily and being responsible.

Don't know why credit is important and what role credit scores play in determining how lenders view you? Research the topic by getting a book on credit, reading websites about the topic or visiting the sites of one of the three credit bureaus: Equifax, TransUnion or Experian.

Subsidized Loans

Some loans, such as student loans and first time homebuyer programs, are extremely cheap loans. Under these programs, somebody else pays interest for you and reduces your total borrowing cost. Use them when you can.

Switching to Cheap Loans

If you already have loans outstanding, can you save money by switching to a better loan?

It may be possible to refinance or consolidate with cheap loans. The tradeoff? You might pay more in interest over your lifetime (even with a lower interest rate), and you could put your home 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.

Analyzing Loans

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

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.

Avoid problems by understanding how peer-to-peer lending works and if family loans are a good idea in your situation.