How to Negotiate with Your Lender

There are two types of negotiations when it comes to lenders. The first happens before signing the loan agreement. It’s when the applicant negotiates the terms and conditions of the loan. A loan payment calculator is a useful tool in that scenario. The second type of negotiation happens when the borrower wants to change the terms of the loan agreement.

Pre-loan: Negotiating Loan Terms and Conditions

Loan applicants often feel they’re at the lender’s mercy when initially approved for funding. That’s not the case. Several aspects of the loan can be negotiated, including interest rate, the length of the loan term, and down payments in certain cases. In a negotiation, these are known as “levers” that borrowers can use to get a better deal.

Interest rates are not set in stone. The lender may advertise a specific rate and claim it’s the “best they can do,” but there’s always another level they can go to. The borrower should not be afraid to ask for a discount if they have a strong application. Lenders know that applicants with high credit scores and a good payment history can get approved elsewhere. Remind them of that.

The next level is the length of the loan term. Lenders make more money on long-term loans than they do on short-term loans. That APR they advertise isn’t just the interest rate. It also includes fees and monthly charges. On the other side of that argument, they also take on more risk with long-term loans. The applicant should know where they stand so they can use this as leverage.

Down payments come into play when a person applies for a mortgage or auto loan. In both cases, a higher down payment will typically get them better terms on the loan. Putting 20% or more down on a house eliminates the need for private mortgage insurance (PMI). Paying more in cash for a car opens the door to more lender options and a lower APR.

Repayment Negotiations: Refinancing and Debt Settlement

Long-term loans can be refinanced when interest rates go down or financial circumstances change. This is another scenario where the borrower has most of the leverage. The loan already exists. Payments have been made, hopefully on time. Taking that credit history to a lender and asking for new terms is a common practice. The borrower is in a good place to get what they want.

Debt settlement is a different situation. The lender holds the leverage when a person gets behind on payments and needs to offer a lump sum to settle the debt. Most lenders will take a percentage of what’s owed, so they get paid something, but the amount is up to them. The borrower’s only leverage is their financial circumstances. They can plead poverty and may pay pennies on the dollar.

The Bottom Line

Knowing who has the leverage in a lender negotiation is the key to getting good terms and conditions. Interest rate, the length of the loan term, and down payment amount are some of the levers a person can use. When refinancing, their on-time payment history puts them in a strong position. That’s not the case with debt settlement, so most of the leverage belongs to the lender. If a person knows where they stand, they’ll get what they want.

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