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How can I get a low-interest personal loan?
by
Irene Scott
October 2, 2023
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Low-interest personal loans are offered by banks, credit unions, and online lenders. They offer competitive annual percentage rates (APRs) of less than 12 percent to help consumers get the cash they need without spending a fortune on interest.
Customers receive loan proceeds in a lump sum and make monthly payments over a set period, usually two to five years. Most lenders allow you to use the funds as you wish, although some impose spending restrictions.
If you are considering a low-interest personal loan, you will probably need good or excellent credit to qualify. There are also other loan guidelines to consider before applying to make sure you have the best chance of getting the funding.
How do interest rates on personal loans work?
You receive the loan amount in one lump sum and pay monthly installments for a set period, usually two to five years. The monthly installment includes both the principal amount borrowed and the interest rate.
Lenders evaluate a number of factors to determine whether you qualify for a low-interest personal loan, including your credit rating, your employment status, and your level of debt. However, it is the credit rating that plays the most important role, as it gives an idea of how you have managed your past and present debts and the likelihood of default in the future.
FICO scores, which most lenders and creditors use to make lending decisions, range from 300 to 850-the higher the better. The most competitive rates are generally reserved for borrowers with excellent scores (between 720 and 850), since the risk of default is lower.
It is always possible to get a loan with a lower credit score, but it can be difficult to obtain and you can expect a higher interest rate and higher fees.
The average interest rate on a personal loan for people with excellent credit is between 10.73 percent and 12.5 percent. On the other hand, if your credit rating is considered average (630 to 689), the average rate is between 17.8% and 19.9%.
Conditions for granting a personal loan
Each lending institution has its own eligibility conditions for personal loans. However, most lending institutions require that certain general guidelines be considered before submitting an application:
- Credit score. Do you meet the minimum creditworthiness threshold set by the lending institution? If your credit score is lower, you risk paying higher interest rates or being denied financing.
- Income. Is your income regular and verifiable? Lenders want to make sure you can afford to pay your monthly installments on time, and some require a minimum income to qualify for a personal loan.
- Debt-to-income ratio (DTI). How much of your income goes to monthly debts? Even if you have a regular source of income, a debt-to-income ratio that is too high can put a strain on your budget and cause you to fall behind on monthly loan repayments. Your debt-to-income ratio should not exceed 40 percent to have the best chance of obtaining a low-interest personal loan.
How can I qualify for a low-interest personal loan?
Some lenders offer online pre-qualification tools that let you know your chances of approval and estimated rate without affecting your credit rating. If you use this option and are rejected or find that the offers are not as attractive as you had hoped, you are not entirely out of luck. The following steps will help you increase your chances of approval or get better terms before applying for a loan.
Improve your credit rating
An excellent credit rating gives you the best chance of getting a low interest rate on a personal loan. If your score is not at the desired level, check your credit report for errors that negatively affect your score and remove them quickly.
Also update all past due accounts and continue to make timely payments on all other accounts. You can reduce credit card balances to reduce your credit utilization rate or the amount of your current credit limits. It is also important to refrain from applying for new credit, as each credit application reduces your score by a few points.
Getting a cosigner
If your lending institution offers this option, consider applying for a loan on better terms with a cosigner. This person should have an excellent credit rating and a stable, verifiable source of income.
Remember that the account activity will appear on the cosigner's credit file. It is therefore essential to keep the loan current to avoid negative reports. But if you fail to comply with the loan agreement, your cosigner will be responsible for payments.
Working with a credit union
Credit unions are nonprofit organizations whose goal is to provide banking solutions to their members. Their personal loan rates are often lower than those of traditional banks. According to the National Credit Union Administration, as of March 31, 2023, the national average rate for a 36-month fixed-rate personal loan was 10.02 and 10.75 for credit unions and banks, respectively.
Membership may be limited to people who work for a certain employer, are members of a certain organization, or live in a certain area.
Some credit unions also grant membership to relatives of existing members. However, because each credit union is different, all local options should be examined before applying for membership to ensure that you meet the minimum requirements.
Get a discount on automatic payments
If you already qualify for the lowest rate offered by the creditor, consider signing up for automatic payments if the creditor offers a discount on automatic payments. Although the discount is usually around 0.25 percent, the savings can accumulate over time.
When signing up for automatic payments, be sure to plan for monthly outgoings to avoid overdraft fees, which can reduce the overall value of the loan.
What you need to know to find a low-interest personal loan
Once you understand how personal loan interest rates work and what most lenders require, the next step is to look for the best deal. Here's what you need to know when comparing lenders:
- Interest and fees. Is the interest rate the lowest of those selected? Are there any opening, underwriting or early repayment fees? How does the APR (interest and fees) compare to the competition?
- Loan terms. Does the lending institution offer different loan terms? If you can afford to pay monthly installments over a shorter period, the lending institution may offer you a lower interest rate. On the other hand, if you need a lower monthly installment, a longer term is ideal.
- Online pre-qualification. Is it possible to get pre-qualified online without damaging your credit rating? These tools make it easier to find information and avoid formally applying to lenders that are not a good fit for you.
- Incentives for lenders. Are there incentives for referrals? Can you get a reduced rate if you sign up for automatic payments? Does the lending institution give you free access to your credit rating?
An excellent credit rating, a regular income, and a low level of debt are ideal conditions for obtaining a low-interest personal loan. However, if your finances are not in good shape, before applying for a personal loan, consider taking a step back to improve your credit rating and reduce your borrowing rate.
If you cannot wait and need funds as soon as possible, you might also try applying for a cosigner or take advantage of an autopsy discount to get a better deal. The most important thing is to look for the best low-interest personal loan for your credit situation, do a pre-qualification if possible, and be sure to compare options before signing on the dotted line.
