Now is the time to review rate-sensitive areas
“What’s your interest rate?” continues to be a frequent and important front-end question when it comes to borrowing money. There’s often more to the number than the initial quoted rate. Interest rates can vary even with the same lender or company. As we all know, our credit rating is a key factor in attaining the “best rate” possible. Good credit scores and ratings equate to good risk and lower interest rates.
In our local area, our banks and lenders are operating in a highly competitive marketplace. Therefore, they have a strong interest in finding the right balance between earning (or retaining) your business while satisfying bank management’s desire for profitable loans.
I’ve always contended that while the interest rate is a principal factor when borrowing, there are other components to be aware of:
• Is this rate based on simple interest? What is the effective rate?
• Are there prepayment clauses – if so, please explain so you understand
• What factors determine the rate I’ll be charged? Origination and other fees?
• Will more down payment or other credit issues influence my rate?
Keep in mind at some point in your loan or credit arrangement, you will benefit by advance payments. You can sometimes prepay your loan. You’ll want to apply extra money to the loan principal on a one-time basis. You could make an additional monthly payment (13 instead of 12 per year). A prepayment clause is typically limited to five years. You can prepay afterwards.
You want to carefully look over and review the promissory note and related agreements before signing your loan or credit documents. If you are not comfortable with this, consult an attorney or other trusted advisor. In fact, request copies of your loan documents in advance so you can review them beforehand in a more relaxed environment.
Don’t be afraid to ask questions. Your banker, lender, Realtor and closing agent are all interested in you having a good understanding of the loan.
Let’s breakdown some rate-sensitive areas:
Credit Cards and their respective interest rates can be negotiated. Most providers have a toll-free number, a website address or both on the reverse side of the card. These are traditionally the highest rate debt that most consumers have so you’ll want to focus on these rates first. Your good credit history deserves to be rewarded. Don’t be afraid to ask for a better rate.
Vehicle and Equipment Loans can sometimes result in reduced rates if you contact the lending agency. Often, this is a third party who has a credit relationship with the dealer where you purchased the vehicle or equipment.
Real Estate and Business Loans are areas where it can really reward you to inquire about a reduced rate. Many people will refinance their home loan yet leave their other real estate debt as is. Unless there is a prepayment penalty or fee and if you’ve had your long-term loan for a while, give your bank or lender a call. Most lenders do not want you to shop or refinance your loan. They are often willing to renegotiate your rate to retain your business. A dedicated lender will consider your business relationship and not just that one loan when discussing rates. This one can potentially save you thousands over the remaining life of your loan.
The Rate Type matters as well. Lenders may offer variable, adjustable or fixed interest rate options. The rate type will be clearly identified on your promissory note or other loan documents. Know what type you have. As of this writing, rates are still relatively low. Therefore, you’d like to fix or lock in your rate when possible. You’ll also get the benefit of a known payment for the life of the loan for the rate lock period.
In closing, a little effort on your part can result in considerable savings on the debt side of your balance sheet. Hey, it’s your money.
Ken W. Knies is an agricultural and rural consultant. He holds a bachelor’s of science and arts from the University of Arkansas and a master’s of business administration from Webster University in St. Louis, Mo. He formed Ag Strategies, LLC as a business unit focused on
quality borrowers and lenders.
