When applying for a new consumer loan, one of the most important items to take into account is the monthly payment. You want to make sure that the payment comfortably fits into your monthly budget. If potential loans are returning payments that are too high for your bank account, here are a few ways you can make the payment more affordable.
1. Extend the Loan's Term
One of the easiest ways to lower a loan's monthly payment is extend the term of the loan. Since the repayment period is lower, this reduces the payment. As an example, assume that you borrow $10,000 at an 8 percent interest rate. If you opt for a 3-year term, your payments are $313 each month. However, if you decide to go for a 5-year loan, this reduces the monthly payment $203.
Be aware that extending the loan's term does increase the amount of interest that you pay over the life of the loan. Assuming the loan has no prepayment penalty, you can always make additional payments to pay the loan off ahead of schedule.
2. Improve Your Credit
Your credit history is one of the most important factors that lenders take into consideration when deciding the terms of your loan. If your credit has a few blemishes, taking steps to improve it is an easy way to obtain a lower interest rate that results in a lower loan payment.
Start by making sure you make all of your debt payments on time, as late payments are reported to your credit history and lower your score. If you have credit cards, don't max the cards out. Preferably, keep the balance under 30 percent of the card's limit. Review your credit report for any mistakes, and dispute any incorrect information.
One way to quickly improve the credit history used for your loan is to apply for the loan with a co-signer. The lender will then use the co-signer's credit history when assigning an interest rate.
3. Make a Larger Down Payment
If you are using the loan to finance a purchase, such as a car or home, making a larger down payment can reduce your interest rate. When you make a larger down payment, this reduces the loan's loan-to-value.
Assume that you are borrowing $20,000 and make a ten percent down payment of $2,000; this yields a loan-to-value of $18,000. The lower your loan-to-value figure, the lower your interest rate. Lenders prefer a low loan-to-value because it is less risky; if you default on your payments and the lender has to seize your home or car, your lender has a better chance of recouping what you still owe.