Personal loan interest rates can vary significantly. When comparing personal loans, you'll notice that they come with a wide variety of interest rates. In order to keep your loan cost as low as possible, you should look for one with a low interest rate. Although the interest rate is not the only cost factor to consider (because most loans have an application or establishment fee, and may have monthly or annual account-keeping fees and early repayment fees), interest charges do form the major part of your loan cost.
How to qualify for a low interest rate
You won't necessarily be offered the lowest advertised interest rate when you apply for a loan from a particular lender. In fact, you may see interest rates advertised as, for example, '6.95%-16.5%'. To qualify for a loan interest rate at the lower end of that scale you will need to have a credit score in the range good to excellent, and a strong financial record. So check your credit score before you apply, and also request a free copy of your credit history file from one of the national credit agencies.
If your credit score and history are less than perfect, you can still lower your interest rate by opting for a secured personal loan – that is, one backed by collateral in the form of an asset you own, such as your home or car. The lender sees a secured loan as less risky, because they could take possession of your asset and sell it to recover their funds if you default on the loan. Less risky loans usually qualify for lower interest rates.
Main features of a low-interest personal loan
A good low-interest personal loan will have a fixed interest rate (so that you know the low rate will remain low) and a fixed repayment term. The monthly repayment amount will always be the same.
Low-interest loans are usually the most affordable type of loan, because you'll spend less over the loan's lifespan. Your interest rate should be significantly lower than regular credit card interest rates.
Two kinds of low-interest personal loan
Check out these main loan types to make sure that you find the one that's right for you:
- Secured personal loan: You can usually get a larger loan amount and a better interest rate if you opt for a secured low-interest loan. This is because the loan is secured by collateral, which could be your house or car, lessening the risk for the lender. If you have collateral to support your loan, not only will lenders look favourably at your application but they may also compensate you with a lower interest rate. But you are putting your asset on the line for repossession by the lender if you default on the loan.
- Unsecured personal loan: Interest rates for unsecured personal loan are usually higher, but if you don't have an asset to offer as collateral, or don't want to risk losing it, you can still find a competitive interest rate by shopping around.
Alternatives to a low-interest personal loan
- Credit card: A low-interest personal loan is not the only way to finance your purchases at a low cost. Some low-interest credit cards have rates which are very competitive when compared with a low-interest personal loan, and credit card repayments are much more flexible than structured loan repayments.
- Balance transfer offer: You could also use a credit card to make the major purchase you're intending to finance, and then apply for a new credit card with a 0% balance transfer offer for a period of 6-12 months, sometimes even longer. This type of credit card has the best low interest rate of all – 0% – on your borrowings, but it has a much shorter repayment term before the high revert interest rate kicks in for any remaining balance you haven't been able to repay. So only consider this option if you're confident you can repay in full within the introductory offer period.