How to qualify for low interest personal loans

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The higher your credit score, the more likely you are to qualify for a low rate personal loan. (Shutterstock)

When you need to borrow money, a Personal loan can be useful. If you’re able to get a lower interest rate, it can save you a lot of money over the life of your loan. Interest rates vary depending on the amount you want to borrow, the length of your loan, your credit score, and other factors. The higher your score, the less interest you will pay.

Here’s how low interest loans work and how to improve your chances of qualifying for a better interest rate.

With Credible, you can compare personal loan rates to see what rate you may qualify for.

What is an interest rate?

Borrowing money has a cost. When you take out a loan, lenders charge you a interest rate in addition to the loan amount you borrow, which is expressed as a percentage. If the interest rate is fixed, you will pay the same amount for the entire term of the loan. If the interest rate is variable or floating, the amount you pay may change over time based on market fluctuations.

When you have a lower interest rate, you will pay less to borrow money over the life of the loan. Your interest rate is included in your annual percentage rate, or APR, which is the total cost of borrowing money for one year. APRs also include any fees or costs associated with the loan, so it’s a more accurate representation of how much you’ll pay than your interest rate alone.

Personal loans often come with lower interest rates than credit cards. The average interest rate for a 24-month personal loan was 9.09% in November 2021, while the average credit card interest rate was 16.44%, according to Federal Reserve Data.

How to qualify for low interest personal loans

As more and more loan products on the market are designed for consumers with good credit ratingshaving a lower credit score does not make borrowing money impossible.

It’s usually easier to qualify for a low interest personal loan when you have a strong credit history. To qualify for the best possible interest rates, you’ll need a good to excellent credit score (a FICO score of 740 and above). If you have a bad credit rating, you may find it difficult to benefit from a low interest personal loan. Many lenders work with borrowers who have lower credit scores, but you can expect to pay higher interest rates and fees.

If you’re not sure what interest rates you might qualify for, it may be worth prequalifying for a personal loan. Many lenders offer personal loan prequalification, which only involves an indirect credit check, so you won’t hurt your credit by applying. Once you have a few prequalification offers, you can see which lender is most likely to offer you the best loan rates and terms (although prequalification offers do not guarantee loan approval).

You can use Credible to compare personal loan rates from various lenders, without affecting your credit.

How to compare personal loan offers

Keep these things in mind when shopping around and comparing personal loan offers:

  • Interest rate – The higher the interest rate, the more you will pay to borrow money. You should try to get the lowest rate possible to save on interest.
  • Loan amounts — Every lender will be willing to lend a different amount of money for borrowers. It is important to find a lender who can provide you with the amount you need.
  • Repayment Terms – Confirm how long each lender will give you to repay your loan. The repayment term of a loan can greatly affect the amount of your monthly payments, as well as the amount of interest you will pay. Although longer-term loans have lower monthly payments, they also incur more interest payments.
  • Costs – Check the fees charged by each lender. Some of the most common include origination fees for processing your loan, late fees if you miss a payment, and prepayment penalties for prepaying your loan.
  • Discounts — Can the lender offer you discounts that will help you save money on the loan? It never hurts to ask.

How to qualify for low interest with bad credit

If you have poor credit, it’s still possible to qualify for a personal loan, but you can expect to receive a higher interest rate. If you’re having trouble qualifying for a personal loan at an affordable interest rate, applying with a co-signer who has good to excellent credit can help you get a lower rate, better loan terms, or the of them.

But be careful before adding a co-signer: If you are unable to make the payments on your personal loan, your co-signer will be responsible. If you both fail to make the loan payments, your credit ratings will both suffer.

How to improve your credit score

If you can wait a bit before applying for a personal loan, there are some steps you can take to improve your credit score — and your chances of qualifying for a loan with more favorable interest rates and repayment terms:

  • Check your credit. Sometimes errors can appear on your credit report and affect your credit score. Before applying for any form of credit, review your credit report with each of the three major credit bureaus – Equifax, Experian and TransUnion – to make sure there are no errors that lower your score. You can dispute any suspected errors with the credit bureau and if you are correct the errors will be removed from your report which can help build your credit score.
  • Pay all your bills on time. Paying your bills on time each month is one of the best ways to establish a positive payment history and improve your credit score over time. If you have trouble knowing when your bills are due, consider setting up automatic payments or electronic reminders. If you’ve missed some payments in the past, keep track of those bills and try to stay up to date to improve your credit score.
  • Pay off credit card balances. The lower your credit utilization rate, the more your credit score will benefit. Your credit utilization rate compares the amount of available revolving credit you have to the amount of available revolving credit you are currently using. Ideally, you will keep your credit utilization rate below 30%. To lower your credit utilization ratio, pay off any existing credit card debt and continue to pay down your balance each month.
  • Avoid new loans when possible. Do not take out new forms of credit unless absolutely necessary when preparing to apply for a large loan product such as a personal loan. Lenders consider taking out several new credit products over a short period of time as a sign of financial instability. It is therefore best to focus on applying for one type of credit product at a time.

Is the personal loan for you?

A personal loan is a convenient and flexible loan product. You can use the funds from a personal loan to finance almost any purchase you want, such as covering the cost of home repairs, financing a wedding or paying medical bills.

But taking out a personal loan is an important financial step and may not be for everyone. Whether the cost of borrowing the money is worth what you intend to spend is up to you. If you can wait, you might be better off saving up for the purchase or expense so you don’t have to pay unnecessary interest or fees when borrowing money.

Remember, the better your credit score, the lower your personal loan interest rate is likely to be. Take the time to shop around and compare multiple personal lenders to get the best deal for your unique situation. If you can wait to apply for a personal loan, you’ll have even more time to improve your credit score, which can lead to better personal loan options and lower interest rates.

When you’re ready to apply for a personal loan, visit Credible for quick and easy compare personal loan rates.