If you’re shopping around for a personal loan, you may have noticed that some lenders advertise their loans with interest rate ranges rather than a set interest rate. This means that if you apply and get approved for a personal loan, you’ll receive an interest rate somewhere within that range.
So, why do lenders use interest rate ranges and how can you qualify for the lowest possible rate? Let’s take a closer look.
A personal loan interest rate range lays out the minimum and maximum interest rates offered by a specific lender. This means you’ll get an interest rate somewhere within the range when you take out a personal loan.
For example, if a lender advertises a personal loan interest rate range of 7.5% – 20.15%, and you apply and are approved for a loan, the interest rate that applies to your loan could be anywhere within the range quoted.
So, how do you know what rate you’ll get? The rate you’re offered will be determined by a number of factors including:
Your credit score
Your overall financial situation
The loan repayment terms
Your income and ability to make repayments
Does every lender have an interest rate range?
No. While some lenders use interest rate ranges, others have a set rate for all borrowers. If a loan is promoted with a set rate, everyone who applies and is approved for that loan will get the rate quoted.
Just like loans with interest rate ranges, personal loans with set rates are clearly advertised as such. This allows you to accurately compare loans with the same type of interest rate structure.
Why do lenders set interest rate ranges for their loans?
There are a number of reasons why some lenders prefer to offer interest rate ranges instead of set rates. These include:
They can tailor the loan to suit the borrower. Interest rate ranges give lenders the flexibility they need to tailor their personal loans to meet the unique financial needs and repayment terms of a wide variety of borrowers.
They can approve a wider range of borrowers. By offering a set rate, lenders limit the number of borrowers that will meet the necessary lending criteria, as well as limit those who are able to afford the loan repayments. Introducing an interest rate range can make their loan more accessible to a wider range of borrowers with varying financial circumstances and credit scores.
They can set the interest rate depending on the level of risk. Different borrowers come with different levels of risk for lenders. For example, a high-income earner with a perfect credit history is a much less risky lending prospect than someone on a lower income with a poor credit score. Interest rate ranges allow lenders to set a rate that reflects the risk profile of each unique individual.
How is the interest rate determined?
The difference between the minimum and maximum figures in an interest rate range can be quite large, so how does the lender determine the exact rate that will apply to you? Well, there are a number of factors that affect how your rate is calculated – and the process will vary depending on the lender you choose.
Some lenders determine your rate based on your credit report only, while others calculate rates by taking an in-depth look at your risk profile. This means a lender may consider the following factors when deciding which rate in their range will be right for you:
Your credit score. Your credit score is a figure that represents your credit worthiness, and lenders use it to decide whether or not they should offer you a loan. The higher your credit score, the more likely you will be to make on-time payments – which can not only help you get approved for a loan, but also help you qualify for a lower rate.
Your credit history. Your credit score is based on an analysis of the information in your credit file. Many lenders will also consider the actual listings on your credit file when determining your personal loan interest rate. Black marks in your file, such as missed or late payments, could cause the lender to offer you a higher rate.
Your financial situation. When you apply for a personal loan, you’ll need to provide details of your current financial situation. This usually includes details of your income, employment, assets and liabilities. The lender will use this information to determine your ability to repay the money you borrow, and therefore work out your interest rate.
The loan repayment terms. The lender will also look at the specifics of your loan, such as the loan term and the frequency of your repayments, when deciding what your interest rate will be.
How do I know what rate I will receive?
If you apply for a personal loan advertised with an interest rate range, you won’t know for certain what rate you will receive. This can be frustrating for borrowers who prefer the peace of mind that comes with certainty, but there are a few simple steps you can take to get a rough idea of the rate you’ll be given.
Check your credit score. Checking your credit score is a great place to start, as a good credit score will help you receive a lower rate. By taking steps to improve your score, such as paying down credit cards or fixing errors on your credit file, you could soon be able to access a lower interest rate.
Consider your financial history. If you’ve always paid balances on time and in full and you’ve got a positive credit history, you can rest assured that you’ll be in a good position to get an interest rate on the lower end of the range.
Read the fine print. Read the information listed on a lenders website to get a better idea of how each lender calculates their rates. Once you know the process involved and the factors that are considered when deciding on a rate, you’ll be able to formulate a clearer picture of the rate you may receive.
Frequently asked questions
While it varies depending on the province or territory you reside in as well as the lender you choose, you can typically expect personal loan ranges to sit between 4.5% and 55%.
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