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How To Get The Best Interest Rate On Your Personal Loan
●April 9, 2021●7 minute read
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Interest can easily determine whether you pay back hundreds if not thousands of dollars more on the balance of your personal loan. Finding the best interest rates on your personal loan can be one factor in finding the best suited personal loan for you. When applying for a loan, here are some things you should consider that can influence the interest rate offered to you.
Which personal loans are available for you?
Before you apply for a personal loan, it is important to know all of your options. There are an abundance of lenders offering hundreds of loan options. So that you can apply for the loan with the best interest rates for you, it’s important to know what your options are and whether you qualify for them. You may wish to search for ‘personal loans with best bank interest rates Australia’ or ‘best personal loan interest rates’ to find results that are in line with your preferences. When you know what options are available to you, you can make a more informed decision and limit the need for multiple applications.
Secured loan vs unsecured personal loan
A secured personal loan requires you to offer an asset to hold against your loan as collateral. This could be in the form of a car, a motorbike or a caravan. Typically, secured personal loans are for borrowing larger amounts and there is, therefore, more risk involved for the lender.
An unsecured loan is a personal loan in which you are not required to offer collateral. Subsequently, an unsecured loan will typically accompany a higher interest rate. This is because in the event you are unable to repay your loan, the lender has no ability to recoup their losses via your asset.
Therefore, if you are searching for a loan option with lower interest, this will likely be a secured personal loan.
Short term vs long term loan
Short term personal loans are great for a short term financial solution. They are typically unsecured, as they are for smaller amounts, and are to be paid back over a smaller repayment period. Due to the loan being unsecured, you are likely to be offered a higher interest rate.
Long term loans are typically for 5 to 7 years and are usually used for borrowing a larger loan amount. Because the loan period is longer than a short term loan, you are usually offered a lower interest rate and pay smaller amounts in your instalments.
While short term loans accompany higher interest rates, generally you will end up paying more in interest with a long term loan. This is because the interest paid has longer to accumulate. This is a clear demonstration of the best personal loan interest rates only being one factor in the most suited loan to your needs; a short term loan will accompany higher interest, but less interest paid over time. If it is feasible, a short loan term will save you money in interest and therefore may be the best interest rate for you.
Having good credit
Your credit score will also impact the interest rate you are offered on your loan. Typically, if you have a bad credit score, you will have difficulty securing credit products from a traditional lender like a bank or credit union. You may only be offered bad credit loans from online lenders that have more lenient credit requirements.
Having good credit allows you to have more options to choose from and therefore more room to negotiate with lenders. If you have a demonstrated history of repaying your loans on time and without defaults or missed payments, lenders are more likely to trust you to repay your loan. Therefore, they will likely offer you better interest rates than if you were to have bad credit.
Interest rates that are offered to you are somewhat reflective of your ability to repay your loan. If you have poor credit, you are considered a more ‘high-risk borrower’ and interest rates offered to you will reflect this. Therefore, in order to be offered the best interest rates Australia, having good credit is vital.
Tips to improve your credit score
If you want to improve your credit score and therefore maximise your loan options, here are just a few tips that will help you:
- Check your credit report for errors. Incorrect information can affect your credit score. Check your credit report for any mistakes, even if they are minor, and contact a credit bureau to fix them. Check for duplicate entries, correct repayment amounts, and that all of your personal information is correct
- Always pay your debts on time. Missed or late payments will be recorded on your credit report and may cause your credit score to dip. If you are afraid you may forget payment dates, you may be able to set up a direct debit to automatically leave your account.
- Keep your credit card balance low. Keeping a large balance on your credit card is not only costly; it can affect your credit score. Maxing out your credit card every month may negatively impact your credit.
- Keep old credit accounts open. Having a long history with a credit provider is deemed as a sign of trust. You may wish to consider keeping old credit accounts open even if they are not currently in use.
- Don’t apply for multiple loans at one time. Every time you apply for a form of credit, a credit enquiry is lodged on your credit report. Several enquiries in a short timeframe may cause your score to drop. Whether you are approved for the loan or not, the credit enquiry will remain on your credit report. Try to space out loan applications as much as you can to avoid this.
Fixed rates vs variable interest rates
A fixed interest rate is a loan in which the interest rate does not change over the period of your loan. This allows you to know exactly how much interest you will pay throughout the life of your loan; you can therefore predict and budget for your future loan repayments.
A variable interest rate changes based on fluctuations in the market. This means that the interest owed on the balance of your loan will change. This variable rate can be influenced by the cash rate as dictated by the Reserve Bank of Australia (RBA). Variable rates can often be the best bank interest rates if the market is favourable.
A fixed interest rate is best if the market is already low and the interest rate you are offered is competitive. However, if the market is fluctuating, you may wish to consider a variable rate as this will be reflected in your interest rate.
Consolidate your debts
If you are having trouble managing your debts effectively and are searching for a better interest rate on your personal loans, you may wish to consolidate your debts. A consolidation loan can be used to streamline all of your different debts into one repayment plan; this can potentially save you money on interest and other monthly fees. Having just one loan means that you will have one clear repayment plan and you can therefore predict when you will be debt-free.
However, a consolidation loan can end up costing you more in fees when factoring in the transferring costs of all of your loans. It is important to calculate whether a consolidation loan will save you money or cost you more in the long run.
Find the right lender
It may be most important to find the right lender to suit your individual needs. If a banks offering is not suited to your needs, you may wish to consider an online lender. Online lenders are on the rise in Australia in line with the high demand of Australians searching for credit.
If you are searching for a loan with low interest rates, then a lender offering competitive interest rates may be most suited to you. Jacaranda Finance is an online lender specialising in delivering fast cash loans. We offer competitive interest rates on our loan options and offer credit options for people in all financial situations, including bad credit loans.
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Written by Jacaranda Team