If you’ve been shopping around for loans, you’ve probably noticed that personal loan rates seem to be much higher than the rates you can receive on a car loan or a mortgage loan. The main reason for this is that a personal loan is not secured. When a bank lends you money for a car or a home, the loan is secured because of the property attached.
When a bank lends you money for a personal loans, all they essentially have is your word that you will pay them back by the agreed upon date, at the agreed upon interest rate. The lack of collateral is what makes interest rates for personal loans so high. The terms of agreement are also much shorter.
It is not impossible to get a low interest rate on your personal loan, however. All it takes is sound financial management. The main factor that a bank will look at before deciding what interest rate to lend to you at is your credit score. Unless you have a solid credit score, obtaining a favorable interest rate is quite difficult.
There are credit score tiers used to rank applicants, so a bank can easily decide whether to lend to you. The A+ tier, reserved for applicants with a credit score over 730, qualify for the lowest possible rates. For a loan that is issued over a period of three years or less, a person with a credit score over 730 is able to borrow at an interest rate of 7.95 percent.
Loans that are given out for a three to five year period come at a slightly higher interest rate of 8.25 percent. If you are not in the A+ tier, you may still be able to receive a low interest rate personal loan. Tier A is also eligible for favorable interest rates of 8.2 percent for a short term loan and 8.5 percent for a longer term loan.
Tier A is for those whose credit score falls between 680 and 729. Tier B lenders, whose credit scores are between 640 and 679 can receive interest rates as low as 9.7 percent on a loan of three years or less and 10 percent on a loan of three years or more. Once your score has dipped below 640, that is when rates start to become unfavorable.
If your credit score falls between 600 and 639, your rates skyrocket to 15.8 percent for short term loans and 16.1 percent for long term. And for those whose score is under 600? 21 percent interest rates across the board. While these figures are only representative of one current lender’s rates, applicants can expect a similar outcome.
Applying for a low interest rate personal loan with a credit score below 680 is usually a fool’s errand. Which brings us to the second important factor in finding a low interest rate personal loan, shopping around. Every important purchase in life involves going to every possible store and comparing prices.
So why wouldn’t you do the same for a personal loan? If you are able to obtain a personal loan, this will become one of the most important monthly bills that you have to pay for years to come, so it behooves you to look around and search for the most favorable rate that you can find.
Don’t be afraid to get rate quotes from a variety of banks and lending institutions and comparison shop. It’s important that you are able to budget for this new expense and if at all feasible, you should have a couple of payments ready up front.
If you’ve already taken out a loan and managed to improve your credit score considerably since then, you may qualify for a reduced interest rate. Refinancing is a viable option for applicants who have done the research that the current national rate is far lower than the rate they were lent at.
A bank is typically willing to work with people who have shown a consistent dedication to improving their credit score and the good news is that you’ll be able to use the excess money you receive to immediately pay off your old loan. The bank could also be able to simply lower your existing loan rate, but the difference is typically negligible over the life of the loan.
The last option available to those seeking low interest rates on their personal loans is to get a secured loan. This option applies to applicants who already own a home, car and something of equivalent value (such as jewelry) that can be offered up as collateral.
Unless you have a high credit score and a solid history of paying back loans, it will be extremely difficult for you to receive a low interest rate personal loan. Since all the bank has to go on is your word that you are going to pay them back, it makes the process more complicated.
There is no magic wand you can wave to receive a high credit score or low interest rate. The financial decisions you make over the course of your life are what determines your ability to borrow money at a rate you can afford. This is an important fact to bear in mind during your daily financial decision making.