Borrowing always costs money, usually in the form of interest rates but other fees as well. It stands to reason that you’d want to find the cheapest way to borrow and our 9 tips can help you find the best rates for personal loans.
Let’s take a closer look …
1) Work on Your Credit Score
The most important factor in determining the interest rate you will be offered is your credit score – the higher this score the better.
You are assigned the score by credit rating bureaus based on your borrowing record (i.e. what you’ve borrowed in the past and if you repaid on time), how much debt you currently hold, the balance on any credit cards you have, the overall variety of credit and loans you have, and several other factors. You can check your own credit score for free.
Lenders check this score during your application process and use it to assess whether to approve your application and what rate to offer.
If you have struggled with debt in the past and have missed payments or defaults on your report, your score will be poor and you’ll need to work on it to improve the rates you will be offered.
The best way to do this is to bring your debt down to a manageable amount and then borrow small sums (even just regularly using a credit card) to demonstrate that you’re trustworthy and can make repayments on time.
2) Use Multiple Comparison Sites with Soft Search
You will never find the best rates by applying with lenders on an individual basis. There are now many reputable sites that will compare lenders and loan products so you can find the best ones quickly. They will give you a general overview of what’s available and then some will also allow you to input your personal details to get a more accurate picture. They will perform a ‘soft search’ that doesn’t leave a record on your credit report.
Blindly applying with lenders directly will leave a search on your credit report and can negatively impact your score if you keep applying and getting rejected. The good thing about soft search is that it doesn’t do this and will also give you an idea of whether you’ll be approved or not when you formally apply.
Because not all comparison sites compare all lenders, it is a good idea to use multiple sites to get the widest range of interest rate comparisons.
3) Apply for the Right Loan for You
It’s no good applying for a loan over 10 years if you can repay it in 3, even if the interest rate is lower. That’s why you should always calculate the total cost of the loan.
Remember, interest is usually applied monthly. So, a 10-year loan at 5% will cost you more in total interest than a 3-year loan at 10%.
You need to find the sweet spot between how much you need to borrow, how quickly you can pay it off and the changes in rate.
4) Don’t Forget Other Fees
Interest is not the only cost associated with some loans. Although quite rare these days, you could be charged a fee for the credit check and application, if you pay by check or manual bank transfer, and other ‘admin’ processes – without mentioning late payment fees.
All of these fees should be presented to you before you sign any contracts, so don’t forget to include them in your total cost comparison.
5) Is There a Discount Offer?
Some lenders offer small interest rate discounts if you agree to certain terms, such as repayments being automatically debited from your bank account.
6) Consider a Credit Union
When looking for a loan your instinct might be to go online or to the bank, but a local credit union is another option and they often offer better interest rates. Credit Unions are run by their members and they benefit directly from the profit made on your loan.
7) Consider Collateral
If you don’t have the best credit score and are being offered high-interest rates you might consider offering some form of collateral. This is when you pledge your home, car or another high-value asset, should you default on the loan. It gives the lender added assurance that they won’t end up out of pocket.
8) Consider a Co-Signer
A co-signer can be a friend or family member who signs for the loan alongside you and agrees to take on the legal obligation of repayment if you fail to do so.
9) Choose Variable Rates for Short-term Loans
If you are looking for a short-term loan, going with a variable interest rate will usually work out cheaper than a fixed rate. This is because they typically start lower than the fixed rate and go up (or sometimes down) based on the overall rate of the market.
Borrowing money is always an important endeavor and you should never rush into anything. As long as you take your time, shop around, and apply the above tips, you should be able to find the best interest rate for you.