Low-interest loans can help you save money when you use it to consolidate debts. This is more evident when you are consolidating high-interest credit card debts. With personal loans having an interest rate range of 5% to 36%, you need to aim for the lowest interest rate possible so you can maximize the savings that you can get as you pay off your debts. The lower the interest, the less you have to pay.
Of course, that is easier said than done. You cannot demand to get the lowest rate when you borrow personal loans. You need to make sure that you qualify for it so that the lender will view you as a low-risk borrower. That means there is a high chance that you will complete your loan payments. This will prompt them to give you a lower interest rate.
Tips to get low-interest loans to consolidate debts
So how can you get approved to get low-interest loans? There are a couple of tips that you can follow to make this possible.
Know your options
This is important. There are lenders that usually offer a lower interest rate compared to others. This is why you need to do your research. Go online and look at your options. If you are given a pre-approval, use that as your reference and do more research. Make sure you consider at least three lenders before you make a decision.
Have a good credit score
While this will not be the only reason why you will be given a low-interest rate on the loan, it is one of the primary reasons. According to reports, a credit score is “fair” if it is between the low and mid 600’s. At least, this is for the FICO score. The higher the credit score, the higher the chances that you will be given a lower rate.
Improve your debt-to-income ratio
This means you need to either have a lower credit balance or a higher income. Lenders look at this ratio to determine your ability to pay back the loan. If your debt is a lot lower than your income, they will know that you have more extra money to back them back.
Use a collateral
Another option to get the low-interest loans is to use collateral to borrow a secured loan. The collateral will give the lender a sense of security. In case you fail to pay them back, they can seize the collateral as payment. It will also ensure that you will be more motivated to complete your loan payments.
Get a co-signer
Another option is to get a co-signer to borrow the loan with you. Of course, that co-signer should have a great credit score. If you do not have one, the co-signer will increase the chances that you will be approved to get low-interest loans. Your co-signer will also be equally responsible for the loan. If you fail to pay it back, the lender can come after them. This is why some people hesitate in becoming a co-signer – no matter how close your relationship is.
Sign up for discounts
Some lenders offer a lot of options for you to get a lower interest rate. For instance, if you agree to an autopay setup, that can result in an interest rate discount. The autopay will ensure that they will be paid even if you forget a due date.
There are other things that you can do – like asking them to waive the origination fee. While this is not part of the interest rate, it will help lower the cost of borrowing the whole loan.
If you can effectively lower the interest rate on the loan that you will borrow, this can really be a welcome relief for those wanting to consolidate high-interest credit cards.
How to use low-interest loans wisely
Once you get approval for low-interest loans, that is not the end of your efforts. You have to remember that you are still in debt and you still owe the same amount of money. Only the interest will be lower. But in terms of the monthly payments and your debts, it is still there. You still have to go through long months of paying off your debts.
Here are important reminders that will help you use low-interest loans wisely.
Borrow only what you need
Start by borrowing only what you need. If you borrow more than what you need to consolidate, you will only increase the balance that you owe. The more debt that you have, the longer it will take for you to achieve debt freedom.
Include it in the budget plan
Once you have consolidated your debts, you will probably have a new monthly payment. Make sure this is aligned with your budget. You have to get used to using your budget plan – especially when you are in the midst of a debt consolidation program. This plan will ensure that your monthly payments are funded.
Stick to your monthly payments
Finally, you should also make sure that you can stick to your monthly payments. The danger in debt consolidation is the fact that you might feel a false sense of debt freedom. Even if you paid off your original debts, you still have the same amount of debt. You still have to start paying it back. So do not falter in your payments to avoid penalty charges.