A wise man once said that “borrowing money is the equivalent of being charged interest on impatience”. While holding some truth to it, access to credit is also an imperative part of people’s lives. We finance our mortgages, car loans, studies and other important expenses with money borrowed from creditors.

Yet, some forms of credit cost more than others, and the difference can sometimes be substantial. Here we take a look at what rules govern the issuance of credit, and how you may increase the chance of finding the lowest rate.

Taking loans and pay the interest

From the pitfalls of bad credit, to how a consumer loan portal can help you seek out the best offers, you can find the answers from the following paragraphs. Read on.

What’s your credit worthiness?

Your credit worthiness plays a key role when the bank sets the annual percentage rate on your loan. Depending on which country you live in, the score is usually expressed as a numerical digit.

In return, credit scores have an inverse relationship with the ‘risk of default’. This means a bank will assign a higher credit rating to those individuals whom they believe are less likely to default on their payments.

Banks base their rates on many different parameters, including an individual’s income and debt ratio. Taking up new loans will also affect your credit rating.

In some countries these scores are readily available online, along with the information it is based upon. You should therefore start by checking your own score, and weeding out any potential reporting errors.

Analyze different loan offers beforehand

Collecting information on loans can be both difficult and time consuming. You need to chase down the numbers on each bank’s website, along with the individual terms. For that reason, you should consider using a consumer loan portal instead.

These sites offer comprehensive tools for the comparison of loans offers. They’re typically tailored to one single product, e.g. mortgages or consumer loans. Over the past few years, many of these portals have also come to include lending calculators.

In the US, one such example is the website bankrate.com. In other places, such as Europe, it largely depends on your country of residence. One example is the Norwegian lending portal forbrukslån.no. It compares numerous loans offered by the nation’s banks, while listing up their terms and conditions.

These portals allow you to compare tentative interest rates along with multiple other details. Take note of the word ‘tentative’, as it relates to our earlier discussion of credit scores. Financial products are rather unique, in the sense that banks will have to process your loan application before they can offer you an interest rate.

Taking loans

What about your existing loans?

Until now, we’ve talked about ways to save money on new loans. But then what about the old debt that’s been bogging down your household budget for years?

Refinancing is a term that is often brought up by bankers and financial advisors. It simply means to take up a new loan, and then using it to pay off existing debt. Refinancing can carry several benefits, such as lowering your interest rate payments or consolidating multiple small loans.

Yes, you may incur a financial penalty, but in most cases the savings and benefits far outweigh the disadvantages. Penalties are usually tied to the refinancing of mortgages where you entered a contract with a fixed timeframe, such as 15 or 30 years.

Final thoughts

The active comparison of interest rates is a powerful tool for those who seek to cut lending costs. In combination with refinancing and debt consolidation, you may free up substantial amounts over the household budget.

Refinancing has become even more relevant over the last few months, as interest rates keep rising, leading to higher mortgage costs.

As a rule of thumb, when refinancing you should always first focus on paying down those loans that carry the highest APR. Begin by wiping out any non collateralized debt, given that such loans tend to be the most expensive. Money left over should be used to pay down more debt, and thus lowering your total interest charges.

Best of luck!