The best way to lower the interest rate on a personal loan is by refinancing the loan with another lender. When you refinance, you use a new loan or line of credit with a lower interest rate to pay off the old loan, so you owe the old balance to the new lender. And since interest won't be accumulating as quickly, you should be able to pay off the new loan sooner, assuming your monthly payment stays the same or increases.
But some borrowers may also find success simply asking for a lower rate. Asking for a rate reduction is the easiest route, as it doesn't require applying for a new financial product. It's just less reliable. Still, it's a good idea to pursue both paths at once – pre-qualify for some refinancing options and then mention their rates when negotiating. If the original lender won't offer a cheaper rate, then refinance.
How to Get a Lower Interest Rate on a Personal Loan:
- Ask for a lower rate. If you call your lender and express concern that your APR is too high, there's a chance the lender will reduce the rate. That's especially true if you make it clear that you are experiencing temporary financial distress, that your creditworthiness has improved significantly since you applied, or that you are willing to take your business elsewhere. In any case, it doesn't hurt to ask.
- Tap into your home equity. You can refinance an existing personal loan with a home equity loan or home equity line of credit, which are secured by your house but tend to have very low interest rates (4% - 8%).
- Take out another personal loan. If you get a lower interest rate on a new personal loan, you can use it to pay off the old one and save money in the long run.
- Move the debt to a balance transfer credit card. Balance transfer cards offer 0% introductory APRs for a certain number of months, and are best if you'll be able to pay off the remaining balance completely in that time period. You'll need good or excellent credit to qualify.
Tips for Negotiating a Lower Interest Rate on a Personal Loan
You can pre-qualify for a personal loan or for a balance transfer credit card (but not for home equity products). So if you pre-qualify for a loan with lower rates or a 0% balance transfer card, you can use that to your advantage when negotiating with your lender. If they know you're thinking of moving your balance elsewhere, they may work with you. If not, you've got a good deal to fall back on.
It also helps to have another good reason for why the lender should lower your rate. One example is if your credit score has gone up a lot since you first opened the loan, meaning you're a less risky borrower now. Another is if you're having financial hardship (e.g. unemployment, sickness or damage to your home from a natural disaster) and simply can't afford your payments. Lenders may be sympathetic to these problems and offer you at least a temporarily lower interest rate.
The keys to negotiating with your lender are to be clear about what you want to accomplish, truthful about your situation, and polite to the representative. Ask for copy of any new terms you agree to in writing. And if you're unable to get a good deal, refinance instead.