What’s a good interest rate on a loan? Rather than asking yourself that, it helps to have some context first as to what average interest rates are.
And, more importantly, it’s important to first understand how interest rates vary. Depending on the loan type (student loans, auto loans, mortgage loans, etc.), the country’s current economic situation, and your credit score, interest rates can vary from 0% to 200%. That’s quite a big range, right?
Now, back to the question: what are average interest rates? The average personal loan interest rate ranges from about 10-28%, whereas mortgage loan interest rates are expected to hover around 3.46% in 2022. Now, you’re probably thinking, “well how do I get the lowest interest rate?”
Truly, it mostly comes down to your credit score. Having good credit can change quite a bit. Here’s what to know about how your credit score affects your interest rate risk and what to do about it.
Check Your Credit Score
Want to know how to get the lowest interest rate on any type of loan? Check your credit score first! Most interest rates are dependent on your credit score. In fact, we’d argue that your credit score is the foundation of your wealth.
For example, if you have good credit, your interest rate for a mortgage loan could be far less than your friend with bad credit. While that might not seem like such a big deal, over the course of a 30-year mortgage loan, that lower interest rate could save you literally tens of thousands of dollars.
Don’t believe us? Let’s do the math! If you borrow a $200,000 30-year fixed mortgage loan at a 3.3% interest rate, your monthly payments would be $877. Now, if you have poor credit, you might get that loan at a 4.87% interest rate. That would increase your monthly payment to $1,061.
Not that much, right? Think again! That difference of just $184 a month equals a total of $66,343 over the entire life of the loan. Talk about big savings. It definitely pays to check your credit score and work towards increasing it so that you can get the lowest interest rate
How do you check your credit score? There are plenty of free credit monitoring apps that exist. For example, Mint and Float Credit, as we mentioned in our blog about how to repair bad credit. And, if you use the Cheese app, you’re in luck: we’re about to launch a credit builder feature that will help you track and improve your credit score!
Lower Your Credit Utilization
Credit utilization is how much credit you use compared to the total credit you have available. It’s one of the ranking factors that credit bureaus use to calculate your score. As a rule of thumb, you want to keep your credit utilization rate under about 30%.
This means that if you have $10,000 in available credit to use, you never want to have more than $3,000 on your credit statement. It’s not the end of the world if this happens, but your credit score can go down the higher your credit utilization is.
Compare Rates from Different Lenders
Depending on your interest rate risk, you’ll notice that different lenders will give you different offers for loans. Compare those rates from different lenders to ensure that you’re getting the lowest interest rate!
We suggest comparing offers from at least three different lenders if you have that option. Why might they vary so much? Well, to be honest, your offer and interest rate might not jump a whole five points (from 3% to 8%, for example), but because some lenders use different credit scoring models, they could vary enough to make a big impact on your monthly payments.
If one lender looks at your FICO credit score, for example, and the other looks at your Vantage 3.0 score, the numbers could be slightly different. If one of those scores pushes you into the next bracket (from average to good maybe, or even from good to great) then you could get a much better interest rate.
Look for Different Loan Types
You might know that you need a loan to help you consolidate your credit card debt. However, you can look for different loan types outside of a debt consolidation loan. A payday loan could help in a pinch, or a personal loan could be used to pay off that high-interest debt.
If you want to ensure you get the lowest interest rate, sometimes you have to be creative about the loan type that you’re looking to use. An auto loan might come with a higher interest rate than a personal loan, which means that it would make more sense for you to take out the personal loan and use that to finance your new car.
Work Towards Paying Off Existing Debt
Alright, you’ve made it to the end, so we’re gonna give you our best tip for getting the lowest interest rate on anything: pay off your debt! Even if you have to pay it off little by little, the amount of debt you owe has the biggest impact on your credit score.
On top of this, make sure that you are making on-time payments each month, lowering your credit utilization rate, and looking for ways to lower your risk overall as a borrower. By focusing on all of those different factors, you’re sure to get the lowest interest rate.
Use the Cheese Credit Builder Feature
Not sure how to stay on top of everything we’ve just thrown at you? If you already have a Cheese Debit Card, then we suggest you start preparing for the Cheese Credit Builder feature!
We are about to launch an in-app tool that will help you report and track your transaction and payment history so that you can improve your credit score. What’s simpler than paying for things with your Cheese Debit Card, getting those nice rewards, and automatically tracking everything in-app so that you can increase your score?
Sounds like a pretty easy way to always get the lowest interest rate! Apply now and join the waitlist for a better financial future, credit score and all.
