When you take out a personal loan, paying interest on the borrowed amount is one of the most expensive costs you’ll have to pay. While a low interest loan rate can mean lower costs, you’ll likely need to have good credit to qualify.
Read our guide on low interest personal loans to learn more about how low these work. Discover what factors to consider, how to apply for one and the benefits and drawbacks of taking out low interest loans.
What's in this guide?
- Compare low interest loans
- What's considered a low interest rate?
- How do you qualify for low interest loans?
- How do lenders determine my interest rate?
- What types of personal loans have the lowest rates?
- 6 tips to getting a low interest rate
- How to compare low interest loans
- How to apply for a low interest loan?
- Pros and cons of low interest personal loans
- Frequently asked questions about low interest loans
Compare low interest loans
What’s considered a low interest rate?
A low interest rate is typically below 12%, but it depends on your lender and personal finances. The better your credit, the more likely you are to qualify for rates in the single digits.
If you don’t have excellent credit and strong finances, you might want to look at loans secured with collateral or borrow from credit unions, which tend to offer lower rates than other lenders.
How do you qualify for low interest loans?
To qualify for a low interest personal loan, you’ll typically need to meet the following criteria:
- Have a very good to excellent credit score of 720-900.
- Have a strong financial history.
- Borrow a large amount.
You might think that all you need to get that 3% rate is a great credit score, but the truth is that very few people actually qualify for a lender’s absolute lowest rate. Lenders only offer the lowest rates to ideal candidates: People who borrow over a certain amount of money, have a 6-figure income and almost no debt – in other words, the kind of person that probably doesn’t need a loan.
How do lenders determine my interest rate?
The interest rate you’re given by a lender is determined by your financial history and current situation. Lenders want to know how well you can pay back your loan and if you’re likely to default.
- Credit score. Your credit score is an overall picture of your ability to pay back the money you borrow.
- Credit report. Your credit report lists all the accounts you’ve had in the past, the accounts you currently have open and any hard credit inquiries.
- Debt-to-income ratio. Lenders rely more on your debt-to-income (DTI) ratio than your income itself, since it shows the exact amount you have to spend on your loan and the money you owe to other creditors.
- Non-conventional factors. Lenders may also consider less conventional factors, like your work history, level of education and even how many times you’ve changed your phone number over the past few years.
What types of personal loans have the lowest rates?
There are a few of types of loans that generally offer lower interest rates whether or not you have a good credit score. These include:
- Secured personal loan. If you have an asset to offer as a guarantee, such as a vehicle or even a term deposit, you can get a lower rate with a secured personal loan. The security makes the loan less of a risk for the lender and you’re still able to use the funds for the purpose you need.
- Loans offered by banks and credit unions. Banks and credit unions usually offer lower rates than online lenders. Banks especially tend to have the lowest rates, and sometimes offer additional fee reductions when you bundle your financial products with them.
- A competitive unsecured personal loan. There are a number of competitive unsecured personal loans available in the market. If you compare your options, which you can do using the table on this page, you’ll be able to find a low interest rate.
6 tips to getting a low interest rate
How to compare low interest loans
Interest is important, but it’s not the only thing that makes a loan competitive. Compare these other features when looking for the right personal loan for you:
- Loan security. By providing some kind of collateral, like your home equity or your vehicle, you can secure a lower APR.
- Loan amount. Depending on the lender, you may be able to take out a low interest unsecured personal loan for amounts between $500 and $35,000. The maximum amount you can borrow will depend on a few factors including your creditworthiness, your existing financial situation and your ability to make your repayments.
- Loan fees. Some online loans come with set-up fees – typically between 1-3% of your loan amount. However it can reach as high as 5%, which is factored into your APR. There are other fees you might want to look out for that don’t get included in your rate, such as early repayment penalties, late fees or insufficient funds fees.
- Loan term. Getting a loan term that matches your requirement may be easier than you think. You can normally find low interest personal loans with terms from one to six years.
- Processing time. If you need money as quickly as possible, this factor will be important. Some lenders can give you access to funds on the same day you apply, or by the next business day. For others, you may have to wait between 7-10 business days to receive your loan funds.
How to apply for a low interest loan?
If you find a personal loan you’re eligible for, you can either apply online, in person or over the phone, depending on the lender. Many online lenders have pre-qualification options, which give you an estimate of what type of interest rates you might be eligible for without actually doing a hard pull on your credit.
After you submit your loan application, it will be reviewed and a hard credit check will be done on your credit file which will cause a temporary dip in your credit score of around 5 points. At this point, you might be asked to submit additional documentation like bank statements, tax forms or pay stubs.
If you’re approved for an online personal loan, the money will be transferred directly into your bank account. You then have to make repayments on a weekly, bi-weekly or monthly basis until your loan is paid off.
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Pros and cons of low interest personal loans
- Savings. If you take out a low interest personal loan, you’ll save a large sum of money in interest compared to regular or high interest personal loans.
- Easy process. With online, in person and over the phone loans, getting a personal loan has become considerably easy. If applying online, many lenders let you complete the identification process electronically, which simplifies the process.
- Repayment flexibility. You can find lenders that let you make repayments that work with your paycheque schedule, whether that is weekly, bi-weekly or monthly. In addition, some lenders let you repay your loan early without charging you any extra fees or penalties.
- Early repayment penalties. Some lenders charge penalties if you make early repayments. This can put a dent in your plans if you wanted to save on interest payments and repay your loan ahead of time.
- Scams. The online world can be a scary place for those who don’t know how to identify a scam. Before you apply for a low interest personal loan online, find out if the lender you choose is legitimate by doing plenty of research.
- Bad credit is a problem. Finding low interest personal loans if you have a bad credit rating is incredibly difficult, unless you consider getting a secured loan. However, even with this loan type, it will still be challenging to find. What’s a good credit score? Read our full guide here.