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 rate can mean lower costs, you’ll likely need to have good credit to qualify.
Read our guide to learn more about how low interest rate personal loans work. Discover what factors to consider, how to apply for one and the benefits and drawbacks of taking out a personal loan.
The following features usually make up a low interest personal loan:
A low interest personal loan is a term loan that comes with an annual percentage interest rate (APR) below 12%.
Much like any other personal loan, it’s money you borrow to cover an expense, which you pay back plus interest and fees.
A low interest loan tends to cost less than your average personal loan.
Typical eligibility requirements
To qualify for a low interest personal loan, you’ll usually need to meet the following criteria:
Have a very good to excellent credit score of 720-900
Have a strong financial history
Wanting to borrow a large amount
Doesn’t sound like you? You still have low interest loan options. Those without excellent credit might want to look at loans secured with collateral or loans offered by credit unions or peer-to-peer lenders, which tend to offer lower rates than other direct lenders.
Who gets the lowest rates?
You might think that all you need to get that 2.99% APR is a great credit score, but the truth is that very few people actually qualify for a lender’s absolutely lowest rate.
Lenders only offer these low rates to ideal candidates: People who borrow over a certain amount of money, have a six-figure income and almost no debt – in other words, the kind of person that probably doesn’t need a loan.
The average interest rate for people with excellent credit is usually 6-9%.
How does applying for a low interest personal loan work?
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.
How to compare 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. If you cannot provide any collateral, your loan options are limited to low interest unsecured personal loans. 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 seven 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.
Pros and cons
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 easier. 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.
Frequently asked questions
It really depends on your credit score. The average interest rate for borrowers with good to excellent credit is around 6-12%.
Most likely not. Most bad credit borrowers can only qualify for interest rates around 25% and up – if at all, since they’re considered high risk borrowers. If you have a bad credit score, you might want to consider getting a credit builder loan from a credit union, which typically comes with lower rates than a bank would likely offer. Unlike many personal loans, credit builder loans tend to come in small amounts and are designed for the short term borrower, to help improve your credit score before you apply for other types of financing.
If you have all of the required information handy, the process should take around 5 to 10 minutes to fill out the application.
This may vary between lenders, however you will usually need to provide:
Your personal details, including your full name, address, date of birth, phone number, email address and Social Insurance Number (SIN)
Your employment details, including your employer’s name and address and details of your income
Your banking details, including your bank name, transit number, address and your personal account number
Aliyyah Camp is a publisher helping folks compare personal, student, car and business loans. Prior to joining Finder, she ran her own personal finance blog and wrote for numerous finance sites. Aliyyah earned a BA in communication from the University of Pennsylvania. She regularly attends industry conferences to stay in the know about market changes that can affect consumers. When she's not helping people with their personal finances, you can find her at the movies or going for a run outdoors.
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