How to get lower loan rates

What is a low-interest loan?

A low-interest loan is simply one that charges a lower annual percentage rate (APR) than others on the market. Choosing a loan with a low APR means your monthly repayments will be lower and, therefore, more affordable. 

Which type of loan is cheapest?

Secured loans are generally cheaper than unsecured loans. That’s because they require you to use an asset, such as your home, as security against the amount borrowed. If you cannot repay your loan, the lender could repossess your property and sell it to recoup its money.

Because this reduces the lender's risk, interest rates tend to be more competitive than unsecured loans that don’t require an asset to back up the loan. However, secured loans can be riskier for the borrower, so you should think carefully before applying. 

If you take out an unsecured personal loan, different interest rates will apply to different loan amounts. Providers generally reserve the lowest interest rates for sums between £7,500 and £15,000 and offer higher rates on smaller sums.

How to get a low-interest loan

To get a low-interest loan, you typically need a good credit score. A good credit rating suggests to lenders that you’re a responsible borrower, that you don’t miss payments and that you’re likely to repay your loan on time.

The APR that a lender offers you reflects how much risk the company feels it’s taking and how likely it thinks it is to get its money back. If the provider sees you have good credit and considers you a low risk, it is likely to offer you a lower interest rate than someone with poor credit, whom it views as a higher risk.

To increase your chances of getting a low-interest loan, follow the steps below:

1. Check your credit record

Before you apply for a loan, check your credit report for free with one of the three main credit reference agencies (TransUnion, Experian and Equifax). Ensure there are no mistakes on your report, and if there are, correct them.

If your credit score isn’t as good as it could be, take steps to improve it, such as:

• Making sure you are on the electoral roll

• Paying household bills on time

• Paying down existing debt to reduce your credit utilisation ratio (the percentage of available credit you’re using)

• Spacing out credit applications by three to six months. Several applications in a short space of time will make you appear desperate for cash.

2. Shop around and use an eligibility checker

Compare loans from various providers to see which offers the lowest interest rate. Many lenders provide eligibility checkers that help you to see how likely you are to be accepted for a particular loan without hurting your credit score. This will reduce your chances of applying for a loan you’ll be rejected for.

3. Work out if borrowing more will cost less

In some cases, it could be worth borrowing a slightly larger amount to qualify for a lower interest rate. For example, if you were planning to borrow £7,000, choosing to borrow £500 more would tip you into the next APR bracket, and you’d pay a lower rate.

If you're worried about the temptation of borrowing more money than you need, you could put the extra money into a savings account or, if there's no penalty, pay the excess back straight away. 

However, before choosing a larger loan, it’s crucial to check whether you can afford the monthly repayments. If you think you’d struggle, stick to borrowing a smaller amount – never borrow more than you can afford to pay back. 

What should I look out for when I compare loans?

When comparing loans, you should think about the following:

The APR: The APR includes the interest and extra charges like setup fees. When a loan is advertised with a ‘representative APR’, it means that at least 51% of successful applicants will get this rate.

The repayment period or term: Choosing a loan with a longer repayment period can lower the cost of your monthly repayments. However, it also means you’ll pay more interest overall, making it more expensive. 

Fixed or variable rate: Check whether the loan offers a fixed interest rate that will remain the same throughout the term or whether it’s variable, meaning it could go up or down.

Application time: Investigate how long it takes to apply for a loan and how quickly the provider will transfer funds to your bank account. Lenders should usually state this on their website.

Early repayment charges: If you think you might want to pay back your loan before the end of the term, check whether there are any fees for early repayment.  

Alternatives to a low-interest loan

Before applying for a loan, it’s worth considering whether there are any better alternatives. For example:

0% purchase credit card: If you’re borrowing a smaller sum of money  –  e.g. £3,000–£5,000 – a 0% purchase credit card could be a much cheaper option. These cards let you spread the cost of your purchases interest-free over several months. Just make sure you clear the balance before the 0% deal ends and the interest kicks in.

0% money transfer credit card: With a 0% money transfer card, you can transfer funds from your credit card to your current account. You can then use these funds to make a purchase or pay off existing debts more cheaply. Again, you need to clear the balance before the 0% deal is up. And it’s worth noting that you need to pay a transfer fee of around 4%.

0% balance transfer credit card: If you want to consolidate existing credit card debt, take a look at 0% balance transfer cards. These let you shift over existing card debt and pay no interest for a set time. There’s usually a transfer fee of around 3% to pay.

Interest-free overdraft: If you only need to borrow funds for a short time, you might be able to apply for an interest-free overdraft. Some banks provide a small interest-free buffer of around £250, while others provide a larger interest-free overdraft for a limited time.

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