Can I Reduce the Interest on My Personal Loan?
Taking out a personal loan in case of emergency or when you don't have good credit is a quick way to get money, but interest rates can cost you plenty of extra money if you can't afford to make more than minimum payments every month. The good news is that there are ways you can reduce the interest rate on your personal loan. However, none of them are guarantees, so it's worth doing some research before you make a decision.
Refinance Your Loan
Refinancing your loan is basically like taking out a new loan with new terms, but it will apply those new terms to your old loan. If you've improved your credit over the years or if you have a history of on-time payments, you can try to refinance your loan with your lender to get an interest rate appropriate for your current credit rating. In many cases this can reduce the interest you pay, thereby reducing your monthly payment. However, there is a slight risk; in order to explore this option, the lender has to run a hard inquiry on your credit. A hard inquiry can affect your credit score and your opportunities for future lending.
There is also the chance that a credit check could require the lender to increase your payments if your credit has dropped for any reason. If you're sure your credit has improved and your payment history is good, this is a viable option to explore. You can also ask your lender for advice before committing.
Consolidate Your Debt
Debt consolidating involves taking debt from various places and rolling it up into one new loan with a lower interest rate. The total loan amount will be higher, but you'll only have one loan to focus on instead of multiple loans, possibly with higher interest rates. For example, if you have credit card debt, you can open a new card with 0% APR and transfer the balance from your old card, giving you a new card with no interest at all.
Consolidation is generally a better choice for people who have a number of small loans; larger loans can still prove overwhelming even when consolidated, so before you think about applying for another loan to consolidate, make sure you know how much you can afford to pay and whether the new interest rate would give you any improvements.
Transfer Your Loan
Much like consolidating your debt, you can "transfer" your personal loan to another lender. This process is a little different, however, since you can't directly transfer the balance of a personal loan from one lender to another. In this case you would go to another lender, open a new loan to pay off the remainder of your old loan, and then pay off the new loan instead. This new loan would ideally have better terms, but caution should be taken here, as well, as the same rules of refinancing apply. There will be a hard inquiry on your credit, and there's no guarantee the interest rates will be any better. Also read all the fine print; while the interest rate might be lower, there may be other fees attached that could make the new loan no longer worth it.
Reducing the interest rates on your personal loan is possible, but it's not something to jump into lightly. Work on improving your credit and making on-time payments, then go for it after running your numbers and making sure you can make payments on any new established terms.