Interest Rate Negotiation Definition & Meaning

What Is Interest Rate Negotiation?

An interest rate negotiation occurs when a debtor contacts a creditor and requests a lower interest rate on outstanding debt. If the creditor approves the request, the debtor could save money on interest or get a cheaper monthly payment.

Debt can be negotiable, even after you’ve agreed to terms with the creditor. If you’re having trouble paying your debt, you could contact the creditor and ask to adjust the terms. One option is to negotiate a lower interest rate so that your debt doesn’t cost you as much.

Interest rate negotiations are most common with credit card debt and personal loan debt. You typically can’t negotiate a lower rate on secured debt—debt backed by collateral, or something of value—such as a mortgage or an auto loan.

Your creditor decides whether to approve your request. It is most likely to be effective if you're facing demonstrable financial hardship, such as a job loss of severe illness.

If you successfully negotiate a lower interest rate, you may have a smaller monthly payment and your debt might cost you less in interest charges every month. If your negotiation is unsuccessful, then the original interest rate will still apply.

More on Interest Rate Negotiation

Here’s a process you can follow if you need to negotiate the interest rate on a debt:

• Find out if the creditor has a hardship program or financial relief department. You can often find this information and the department’s phone number online. If you don’t turn up anything, call the customer service number on your monthly bill.

• Explain your current situation to your creditor. Perhaps you had a medical issue, an emergency expense, or a drop in your income. Make sure to mention any personal issue contributing to your financial situation. Your creditor may be willing to work with you if you show that you want to pay your debt and you have a good payment history, but you’re going through a financial hardship.

• Ask for a lower interest rate. If the first person you speak to says no, ask to speak to a supervisor.

Interest Rate Negotiation vs. Refinancing

An interest rate negotiation and refinancing are both ways to get a lower interest rate on debt. But even though the results can be similar, these two options work much differently.

When you negotiate your interest rate, you’re asking the creditor to change the terms on your existing debt. When you refinance, you’re replacing your original debt with a new debt under different terms. You may decide to refinance debt if interest rates have dropped or if your credit score has improved since you applied for the original loan.

Here are a few more important differences between how refinancing works compared to an interest rate negotiation:

• You need to apply for a new loan or line of credit to refinance. If approved, you can use that loan or line of credit to pay off your original debt.

• Because refinancing involves a credit application, it puts a hard credit inquiry on your credit file. A hard inquiry could cause a small drop in your credit score.

• Interest rate negotiation doesn’t require a credit application or impact your credit score.

• You can refinance most types of debt. Interest rate negotiation is generally only an option with certain types of debt, most commonly credit card debt and personal loans.