Applying for a credit card, qualifying for a mortgage, and getting an auto loan are exciting life experiences. But when you’re doing these things with poor credit, there’s a damper on your reality. The lender’s approval came with a massive downside: A high APR that seems to be taking a lifetime to pay off.
Your car, home and prized possessions become the bane of your existence.
But as you stay on top of your monthly loan payments, you find yourself back on your feet! Your credit score skyrocketed 50 points, and you think you’re deserving of a lower loan interest rate.
Lenders need your interest payments to stay in business. So before you call up your local branch and directly ask for a lower rate, consider the entire interest rate renegotiation process.
Let’s walk through this process step-by-step to ensure more money in your pocket.
How Are Interest Rates Calculated?
Lenders pull your credit score when you apply for a loan to gauge your financial health. A higher score will show a lender that you have a credit history of paying back loans responsibly. This history makes you less of a financial risk for the lender and qualifies you for lower interest rates.
In the long-term, this can save you thousands.
A low credit score doesn’t necessarily disqualify you from getting a loan or a credit card. But one of two things will typically happen:
- The lender or credit card company will deny your application entirely, so you’ll have to apply again later when you build some credit.
- You’ll get an approval, but it’ll be at an enormous interest rate—the upper-end of the APR range (such as 24.99% on a credit card)—or you’ll have few choices between lenders.
Agreeing to a high APR loan makes buying a home, getting a credit card or leasing a car a reality when you’re struggling financially. But you might not know that these rates can be renegotiated later on, in some circumstances.
Well, so long as you work to improve your credit.
The Benefits of Renegotiating Your Interest Rates
Renegotiating your interest rates can make a massive impact on your lifelong savings and could be a substantial step toward managing your finances. If you’re still on the fence about attempting this step, consider the following benefits:
- Paying your loans back sooner and ridding yourself of debt
- Spending less in the long-run, keeping more in your bank account
- Having a higher income each month, reducing the need to be frugal or limit spending
- Getting confidence that you can make larger purchases without going under
Now, if this sounds too good to be true, it just might be.
If everyone could renegotiate interest rates at their pleasing, we would all have a 30-year fixed mortgage with a 3% APR. Or a credit card with a 12.99% APR.
So the steps we’re about to review won’t be for everyone. You’re more likely to have a lender or credit card company approve your request if you’ve done some work to improve your credit. Since this takes just a few months in many cases, hold off until your credit is “good.”
Here are six steps toward renegotiating your interest rates.
1. Look Into Your Loan’s Terms & Conditions
The excitement of buying a home or leasing a car clouded your memory of what happened that day years ago. All you know is that you signed a ton of papers and walked out with a new set of keys in your hand. But do you remember what you agreed to?
The first step toward interest rate renegotiation is finding out what your interest rate is. And since every lender and credit card is different, here are some tips for finding this data:
- Look at the terms and conditions in your signed agreement
- Check your latest monthly bill that you received in the mail
- Sign in to your online account and look for a digital copy of your terms and conditions
- Give your credit card company or lender a ring and ask them directly (the customer service number is on the back of your credit card)
You might be asking, “What am I looking for here?”
When you’re looking at your agreement or latest credit card statement, you’re looking for “APR,” which stands for “annual percentage rate.” Many lenders and credit card companies will bold this section so that it’s easier to find.
Take note of the number and now do an online search. Your goal is to determine if your current credit card interest rate is higher, similar to, or lower than average. You might find out you have a lower credit card interest rate than the average, which then you might consider consolidation by doing a balance transfer if you have multiple credit cards.
If it’s higher, continue to step two.
2. Get Copies of Your Credit Reports
Now you see that you might be paying more in interest than others, and you’re ready to cut down your payments immediately. But before you call up your credit card company or book an appointment with your mortgage lender, you need to gather some essential documents.
Walking into their office and saying, “I want a lower interest rate on my mortgage,” never goes well. You need to prove that you’re responsible enough to be deserving of a rate reduction.
That means requesting a free credit score from Equifax, Experian and TransUnion. All three are required by law to give you one free credit score report each year, so you won’t have to shell out even more money in this process.
This is the part where you find out if renegotiating your interest rate is worth a try.
If your scores are above 670—preferably above 740—and your score has gone up since you were approved for the loan or card, your renegotiation chances are far greater with a good credit score.
Continue to step three.
3. Seek Pre-Qualification With Another Lender
Negotiation is a crucial part of getting lower interest rates from your lender. And as much as it reflects well on you that you’re staying current on your loan payments, your lender doesn’t have to budge and offer you a lower rate.
That’s why it’s essential to have a few cards up your sleeve.
Lenders don’t want to lose a dime by agreeing to a lower interest rate. But even more so, they don’t want to lose an outstanding loan to another lender. So before you even approach this topic with your lender or credit card company, get in contact with other options.
Figure out what other lenders are willing to offer you, and be sure to emphasize how much your credit score has gone up since the loan began months or years ago. Try to get official documentation from other lenders clarifying the interest rate and terms they’re willing to agree to.
If you can’t find any lenders willing to offer a lower rate than your current lender, then the issue isn’t a stubborn lender—it’s a low credit score or inconsistent payments from the cardholders.
But if you’ve been pre-qualified by other lenders, move to step four.
4. Contact Your Lender Directly
Now that you’ve got an ace up your sleeve, you’re ready to play your cards. Call or make an appointment with your lender or card company to discuss interest rates. Be sure that the person you’re speaking with can lower your rates and isn’t just a call center associate.
Here’s what to do next:
- Bring up the topic of getting a lower interest rate and use your raised credit score and good history with your lender as proof you’re responsible and worthy.
- Ask about other alternatives to a permanent low rate, such as refinancing your loan.
- If the lender rejects your offer, present your offer from other lenders.
- Be willing to negotiate and don’t expect your lender to be okay with the lowest possible interest rate, especially since you’re still building your credit.
The most important skill to have in this instance is confidence.
You’re presenting your lender or credit card issuer with other offers that you’ve gotten. So, either be willing to accept a negotiated new rate or genuinely plan to switch your loan to another lender.
Don’t claim you’re done working with a lender unless you get a certain rate, and then walk out with the same rate. You’ll never be able to lower your rates in the future if your lender knows just telling you “no” works.
If the answer is a flat-out “no,” your lender might allow you to pay off your loan before transferring you over to another lender.
Head on to step five if your lender agrees to a new rate.
5. Consider the Costs of New Rates
Whether your lender agrees to refinance or rewrite the terms and conditions at a lower rate, there’s a downside: You might have to pay a prepayment penalty. Now that probably won’t make a massive difference on a large loan, like a mortgage.
But it can be substantial. It is important to do the math; a better rate doesn't always mean that is the cheapest option.
If your prepayment penalty ends up exceeding the amount you’ll save with your newer interest rate, it’s not worth the effort. Some lenders might be willing to lower or waive this fee entirely. Yet, this would end up costing your lender a significant amount of money.
So before you accept your new loan terms, do the math. Find out if you’re saving money after taking into account the prepayment fees and the lower interest rate. A lower rate each month might be lovely, but you might end up with less money in your bank account later on.
Now, if your lender offers a similar interest rate, but not entirely what the other lenders have offered, you have some thinking to do. Consider the following, if this is the case:
- The value of the loan itself (this will save you more money long-term on a $500,000 mortgage than a $1,500 car loan)
- The paperwork (do you really want to fill out mounds of paperwork for a new rate just to save $5 a month?)
- The deadline of the offer (some lenders will put an expiration date on their interest rate offer, so you might have to make a deal immediately instead of negotiating)
Now it’s time to make a choice.
Are you going to stick with your current lender at a new rate (plus possible prepayment fees)? Or are you going to hand your business to another lender with a lower offer?
If you walked out empty-handed, continue to step six for other options.
6. Have a Back-Up Plan
So your quest to renegotiate your interest rate didn’t go as you’d imagined. Fortunately, you’re not entirely out of options just yet—that high APR doesn’t have to remain for the remainder of your loan’s terms. There are plenty of back-up plans and alternatives, like:
Find Out If Your Lender Offers a Hardship Program
This can come in handy if you suddenly face financial turmoil, such as losing your job, becoming disabled or losing your home to a natural disaster. This type of program can lower your monthly loan payments and help you avoid foreclosure in a time of need.
Just keep in mind that you’ll have to document your hardship and provide information about your finances.
Ask For a Temporary Interest Rate
Your lender might be willing to drop (or negate) your interest rate for a short period, such as six months or a year. Lenders are far more likely to approve this if you’re facing hardship or debt. Just be aware that your interest rate will return to normal once this temporary period ends. This temporary relief is particularly useful if you’re in serious debt.
Continue Raising Your Credit Score
If no lender is willing to finance a lower interest rate, the problem is likely your credit.
- Keep your credit card balance low
- Pay your bills fully and on time
- Don’t open any more credit accounts without needing to do so
This can raise your score in a few short months and mean you can apply again later for a lower APR.
Should You Renegotiate Your Interest Rates?
You should try, but there’s no guarantee your lender or credit card company will approve your request.
So it’s essential to prove you’re financially responsible by raising your FICO score and continuing to make monthly payments on your loans and credit cards.
You should also be aware of possible balance transfer fees and penalties you might face and be willing to negotiate your new rate. Get copies of your loan and credit card terms and conditions before jumping on the most current interest rate. You could end up in a financial situation that could have been avoided with reasonable efforts made at the beginning.
Debt management can be stressful, but there are ways to control it with a little research and effort.