As of April 2025, the prime rate charged by U.S. banks stood at 7.5%, a notable rise from the lows in the early 2020s. This benchmark is typically offered to borrowers with strong credit, so borrowing can be more expensive for anyone with a limited credit history or higher risk. For this reason, lower interest rates can significantly reduce your repayment burden.
As such, this guide will provide practical strategies to get lower interest rates on your loans. At the same time, it will discuss why it matters and the benefits you can enjoy.
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Why Are Lower Interest Rates Important?
Below are the positive effects of low interest rates:
Lower Interest Rates Help You Save More Money
If you’re considering big purchases like investing in a vacation property or financing an auto loan, lower interest rates reduce your total repayment amount.
As a result, you can redirect the money to an emergency fund, a sinking fund, or everyday expenses without putting extra pressure on your budget.
Lower Monthly Payments
With lower monthly payments, you can pay on time and reduce your risk of default. Moreover, you can easily budget the bills dedicated to repaying your loans.
For example, if your personal loan’s monthly repayments are $200 instead of $300 due to lower interest rates, the $100 difference can go toward your daily expenses like transportation.
You won’t need to stretch your budget, especially if you’re living paycheck to paycheck.
Faster Loan Payouts
When interest rate is lower, you can reduce your monthly debt load.
This decrease can positively affect your debt-to-income ratio, which is the percentage of your monthly income that goes to paying debts.
Let’s say you earn $5,000 monthly and pay $2,000 toward debts, making your DTI ratio 40%. But if you pay $500 early, your DTI ratio can drop to 30%.
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How to Get Lower Interest Rates?
The following strategies show how to lower interest rates and make your monthly payments more manageable.
Improve Your Credit Score
If your credit score is low, credit score recovery must be a priority. Lenders typically consider 620 the baseline for good credit.
To achieve this rating, keep the following tips in mind:
Pay Your Bills on Time
Payment history has the biggest influence on your credit score. A single late payment, even by a few days, can stay on your report for years.
To avoid this, set up automatic payments for fixed bills and calendar reminders for variable ones.
If a bill is already late, pay the full amount immediately to stop it from advancing into the next reporting bracket.
Keep Your Credit Card Balance Low
Credit utilization affects a large portion of your score. It measures how much of your available credit is in use.
If your total limit is $5,000, your reported balance should stay under $1,500.
Exceeding that figure signals risk, even if payments are on time. Therefore, make payments before the statement closes to reduce the reported balance.
If possible, split spending across multiple cards to avoid concentrated usage.
Avoid Closing Old Accounts
A longer credit history usually supports a higher score. Closing older accounts shortens your average account age and may raise your utilization if the closed account had a high limit.
Keep these accounts open unless they carry fees or pose a security risk. If the account hasn’t been used recently, add a small recurring charge and pay it off monthly.
Ensure You Have a Credit Mix
Credit scores increase when you successfully manage both revolving credit and installment debt. Revolving credit includes credit cards, while installment debt includes personal, student, or auto loans.
If your report includes only one type, adding more accounts may improve your score.
Don’t Apply for Multiple Credit Accounts at Once
Each credit application triggers a hard inquiry, which lowers your score. Multiple credit account openings in a short period can signal instability, even if your score meets the minimum.
Therefore, apply only when necessary, and space out applications to avoid stacking impacts.
Review Your Credit Reports
Inaccurate credit report information can lower your score. This includes incorrect balances, false late payments, or accounts you didn’t open.
If you don’t have copies of your credit reports, request one from Experian, Equifax, or TransUnion.
Then, file a dispute with your respective bureau and include evidence if you find errors. Track the response until it’s removed or corrected.
Lower Your Debt-to-Income Ratio
Lenders use your DTI ratio to assess how much new debt you can realistically take on.
If you use too much of your income on existing obligations, credit unions can deny your application even with a decent credit score.
Here are some tips to lower your DTI ratio:
Pay Your Existing Debts
Reduce your existing debts where possible. You can use the debt avalanche method to target accounts with the highest interest first to minimize long-term costs.
Another approach is the debt snowball, which focuses on paying off the smallest balances first.
If you prefer a flexible approach, a DIY debt strategy lets you combine both based on your limits.
For more structured support, a debt management plan through a nonprofit agency can consolidate multiple debts into one monthly payment with adjusted terms.
Remember, choose the method you can follow consistently. Also, avoid adding new debt while paying down current balances.
Increase Your Income
Higher income allows you to pay down debt and reduce credit reliance.
To increase your income, take on side hustles, freelance work, extra shifts, or renegotiate your current pay.
Then, apply any increases directly toward outstanding balances or make early payments.
Increase Your Down Payment
A larger down payment reduces the loan amount and improves your loan-to-value ratio, helping you qualify for lower interest rates.
For example, you apply for a $20,000 mortgage over 60 months at 9% interest. With no down payment, the monthly payment is $415. The total interest you’ll pay over the term is $4,911.
However, if you put $5,000 down and finance $15,000 instead, the monthly payment will be $311, and the total interest will be $3,683.
Compare Loan Offers From Multiple Lenders
When comparing lenders, you’ll often choose between short-term and long-term loan options.
Short-term loans are typically repaid within one to two years, while long-term loans can extend for several years or more.
One lender might offer lower interest rates on a short-term loan but require higher monthly payments.
Another may stretch the loan over a longer term with higher interest and added fees.
Whichever you choose depends on your budget and capability. By reviewing the offers, you’re better positioned to select one that is manageable for your repayment capacity.
Negotiate for Lower Interest Rates
When comparing loan offers, negotiate for lower interest rates confidently by highlighting your strengths and inquiring about potential discounts.
Be clear and point to specifics like your credit score, income, or collateral.
Always request a written copy of the final terms. If the offer doesn’t align with your budget or repayment needs, explore other lenders.
Use Collateral
Secured loans are loans with collateral, such as home loans, cars, or other assets.
If you miss payments, the lender has the legal right to take the asset to recover the debt.
Because the risk is lower for the lender, secured loans often have lower interest rates.
If you have reliable income, usable collateral, and a decent credit profile, you may qualify for more favorable terms.
Add a Co-Signer to Get Lower Interest Rates
A co-signer, usually your parent, relative, or trusted friend, adds their income and credit history to your loan application and agrees to repay the loan if you default.
If your co-signer has a good credit history, it can increase your chances of qualifying for low interest rates.
However, some lenders may only offer secured loans or better terms if a co-signer is included.
If a lender requires a co-signer, it usually means your current income or credit profile doesn’t meet their criteria. Before agreeing, ask whether you qualify independently and how the loan terms would differ without one.
Additionally, lenders can’t require your spouse to be a co-signer unless you’re both applying for the loan.
Refinance Your High-Interest Loans
Refinancing replaces your current loan with a new one, typically to reduce your interest rate, change the repayment term, or switch loan types.
Borrowers usually refinance when market rates drop or when they want to restructure debt more efficiently.
Common options include rate-and-term refinancing, cash-out refinancing, and cash-in refinancing.
Since refinancing involves a new loan agreement, lenders will reassess your credit history, income, and in some cases, collateral.
To improve your chances of approval, your credit score should be in good standing.
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Final Thoughts
Small changes in how you manage debt, credit, and expenses can lead to immediate improvements. For instance, a higher credit score, lower debt, and a larger down payment improve loan terms and approval time.
These adjustments can lower interest rates and reduce total repayment.
However, you must still review the full loan terms, including fees, repayment schedules, and conditions, to ensure that the offer aligns with your repayment timeline.
To get more practical insights on loans, interest rates, and other personal finance topics, subscribe to Financial Daily Update today to stay informed.
