Next time you're sitting on an airplane, look at the person in the seat next to you. Then imagine that person is paying $300 less for that seat than you are paying for yours. This scenario isn't very far-fetched. After all, it's possible to hack a better airfare, depending on when you order your ticket, and what days you fly.
The same is true of almost any financial transaction. A little knowledge can go a long way when you want to save money. In fact, that person sitting next to you on the plan might be saving $200 every month on a mortgage, or $50 every month on an auto loan, due to a better loan rate. If you want to hack your loan rate, here's what to do:
Lay the Groundwork
Unfortunately, unlike an airfare, which you can hack no matter what the rest of your finances look like, you need to lay the groundwork for a good loan rate. "First and foremost, you have to take preventative measures," says Brock Blake, the founder and CEO of business lending site Lendio. "Any lender, no matter why you are borrowing money, is going to start with your credit score. You need to manage your score ahead of time."
The steps you can take to manage your credit score are the tried and true financial answers that a lot of people don't like to hear about. You need to make your loan payments on time, pay down your debt, and generally keep your finances in order so that your credit report reflects your good habits.
Don't forget to see where you stand. "Pull copies of reports for each major bureau, and make sure what is on there is accurate," says Greg McBride, the Chief Financial Analyst at Bankrate. "You want to dispute items that are incorrect."
Once you've laid the groundwork for a good credit score, you can begin tweaking things a bit.
"Not every lender offers the same prices, and you need to shop around to see where the deals are," says McBride. "Shopping around increases the odds of getting the most competitive offer. Go beyond your current bank or the bank across the street. Look at credit unions, online aggregators, and small community banks."
There are a number of interesting options for shopping around, especially online. Sites like RateZip and Bankrate offer you the chance to compare rates from lenders all around the country. You can also find competitive loan rates on P2P lending sites like LendingClub and Prosper.
Tweak Your Loan
Realize, too, that the type of loan you get, and the terms, matter as well. McBride points out that you'll get a better interest rate on your primary residence than you will on your vacation home. Your collateral matters. Additionally, McBride points out that your down payment and your debt-to-income ratio matter as well. If you want a better loan rate, you need to be ready to tweak your loan a bit to make yourself look more attractive to lenders.
Creative solutions, like paying points to reduce your mortgage rate, or offering collateral on a personal loan, can help you hack your loan rate.
Ask for a Lower Rate
Of course, you can't get what you don't ask for. "It doesn't hurt to ask for a lower rate," says Blake. "People are uncomfortable asking, but you might be surprised to discover that most lenders have a little leeway to adjust the rate in order to close on the deal."
Before you sign, suggests Blake, use that leverage to try and get the loan rate down a little bit more. If you shop around ahead of time, you can use what you've found as a comparison. "Just pause before you sign and ask if maybe you can lower the rate a half point or even a quarter point. Depending on how big the loan is, and how long the term is, even that small change can make a big difference in your savings."
Bottom Line: Your Credit Score Matters Most
While all of these hacks can help you get a better rate, the reality is that you have to start from a good position with your credit. Stay on top of your credit so that you know where you stand.
"It boils down to putting your best foot forward," says McBride. "Shopping around, a good credit score, your down payment, your debt-to-income ratio -- there just aren't short-term fixes for those things."
"If your credit score stinks, you aren't going to get the same rate as the guy with great credit," McBride continues. "It's like a reputation. It takes a long time to build up."