- 9 min read
- Personal loans can help you pay for emergency bills or large purchases, but use them with care.
- Low interest personal loans are hard to find, if you don't have collateral and strong credit.
- Unsecured personal loans come with higher interest rates than secured loans.
The 5 Ws of Low Interest Personal Loans
If you want to borrow money, you want the lowest possible interest rate and the most convenient terms. Makes sense; who wouldn't want that. The secret to finding a low-interest personal loan with attractive terms is simple — shop around. With so much information accessible on your phone or computer, you can compare offers from different lenders with a minimum of time and effort.
Make sure the lender explains the terms of the loan, including all fees and costs. However, low-interest personal loans are not available to everyone. However, if you can qualify for a loan, there will be a range in the interest rates you are offered. Be prepared when you comparison shop. Lenders will ask tough questions and expect clear responses from you.
Here is a guide to low-interest personal loans, asking and answering for you the 5 Ws:
- What is a low-interest personal loan?
- Why take a personal loan?
- What does it take to qualify a low-interest unsecured loan?
- Where can you find low-interest personal loans?
- When to take a personal loan?
Shop for a Low-Interest Personal Loan
Bills.com makes it easy to shop for a personal loan. Start by filling in your credit score, zip code, loan purpose, and the amount of loan you need. Check out different offers and click on the appropriate ones.
What is a Low Interest Personal Loan?
Loans are taken for all kinds of reasons, such as purchasing a home, buying a car, paying for a wedding and paying off debt at lower costs or better terms. To qualify for a loan, you have to show the lender that you have the means to pay it back, and the willingness to do so. Some loans only require your signature, your guarantee. Many loans, referred to as secured loans, require that you pledge an asset as collateral. Mortgage and auto loans are the most common secured loans. If you don't make your payments, the lender can repossess the car or foreclose on your home;
A loan agreement spells out the responsibilities for the borrower and lenders. The loan agreement will include the loan amount, interest rate, the number of monthy payments you are required to make, the date payments are due, any fees your are charged, when penalties will occur. Loan agreements come with fine print. Read it carefully and ask questions if anything is not clear.
Personal loan: Lenders offer a personal loan to individuals as either a secured personal loan or an unsecured personal loan. It can be either an installment loan paid monthly over a specific period or a revolving line of credit. Charging purchases and paying bills on your credit card and then carrying over the balance is a common form of a personal loan.
Low-Interest rate: 0% financing sound good? Some auto loans are available with no interest. There are also credit card balance transfer offers that offer 0% interest for a limited time. Both require excellent credit. Interest rates vary by the type of loan offered and by how lenders judge your creditworthiness. Excluding the low interest period on Credit card rates range from around 10% to 36%, excluding the 0% or low-interest period on balance transfer offers. Auto loans can hit 20% interest. 30-year fixed mortgage loans, as of early 2020 are below 4% for the best borrowers, but even borrowers with fair credit are likely to get a rate only a few percentage points higher.
Personal loans interest rates have the biggest range of any loan product. The best rates advertised as of April 2020 is 4.99% and there are unsecured installment loans that are offered with rates as high as 155%. Payday loans, a personal loan intended to be repaid within one or two paychecks can have annual interest rates over 1000%.Don't be confused by such a huge gap. Don't focus on the lowest rates available in the marketplace. Instead, work to find the lowest rate for a loan that is offered to you and then weigh whether the costs of the loan are outweighed by the benefit for how you plan to use the money you borrow.
As important as interest rates are when selecting a loan, also pay attention to the loan fees, which can be substantial.
Why Take a Personal Loan?
There are many reasons to take out a personal loan, including debt consolidation; to pay for a home improvement, major expense, or emergency expense (medical expenses, auto repair), to use for significant one-off expenditures (a wedding, purchase of furniture or appliances), or education expenses.
If you have a good reason to take out a personal loan, weigh your options carefully. Before you apply for a loan is also a good time to look at your overall finances and how the loan fits into the picture. Ask yourself some questions, before you start shopping for a low-interest personal loan:
- Do you own a home with equity? If so, look into a cash-out mortgage loan or a HELOC (home equity loan or line of credit) to see if it is a better option.
- Can you cut back expenses and save money? If so, instead of buying on credit, or taking out a loan, create a savings account advance, and then make the purchase.
- Are you borrowing money that, ideally, you should have set aside in an emergency fund?
- If you had a budget, would you need to take the loan or borrow quite as much money?
How do You Qualify for a Low-Interest Personal Loan?
The two most important factors lenders use to assess your loan application are your credit score and your debt to income ratio. Other factors include your employment and credit history. The lender verifies your ability to pay and your history of paying debts on time.
Credit Score: The first thing a lender will check is your credit score. The most common score used is the FICO score, which is based on five main categories (the first two are the most important):
- Payment History: Do you make your payments on time? Late payments are detrimental to your score.
- Credit Utilization: Do you use all your available credit lines? To build and maintain a strong credit score aim to use 10% of your available credit.
- Length of Credit History: Are your accounts new or have you maintained them for a long time? Instead of closing an account, use it sparingly. If your annual fees are high and you want to close accounts, do it progressively.
- Credit Mix: Do you have more than one type of credit? It is best for your score to have different kinds of credit: mortgage, installment loan, credit card, and auto loan
- New Credit: Are you taking out a lot of new credit at the same time? That hurts your score. Stagger your applications for credit over time.
When lenders make a hard credit inquiry, your credit score drops, albeit by a small amount. Multiple credit pulls done for the same product during a 14-day period are only counted once, so shop around during that two-week period.
Debt to Income (DTI) ratio: Lenders analyze your employment situation and the stability of your income. Moving around from job to job decreases your chances of finding a low-interest unsecured loan. The same is true regarding housing, especially if you are paying rent. Lenders use a DTI ratio to determine if you can afford to take on new credit. DTI ratio consists of all mortgage-related payments or rent and all your recurring debt, based on actual payments, or minimum required payments. A general rule of thumb is that a DTI should not exceed 36%. The lower your DTI, the better.
Calculate and Track Your Debt to Income Ratio
Use the Bills.com debt to income calcuator to figure out your DTI.
Who Offers and Where Can You Find Low-Interest Personal Loans?
Traditional banks, credit unions, and peer-to-peer lenders offer personal loans. Some institutions only provide loans to their customers, so start by speaking to your local bank. Check if there are any unique discounts.
Shop around. Check lender web sites to compare rates and call lenders for current rates. Don’t turn in loan applications until you know what type of loan you want and the terms offered. Be very cautious with online or payday companies that advertise quick-and-easy personal loans and stay away from companies asking for upfront fees. If an offer sounds too good to be true, don’t take it. Deal with a lender you trust.
There are many online lenders with good reputations. Some specialize in loans to a certain type of borrower. For example there are lenders who target borrowers with excellent credit, some who work with bad credit borrowers, and some with those in between. Do some research so you apply to a lender that accepts borrowers like you.
Some online lenders are prer-to-peer lenders, such as Prosper.com and Lendingclub.com. They match borrowers seeking loans with people who want to invest money in making loans. Both LendingClub and Prosper use your credit score as a large part of their decision whether to approve your loan and what interest rate you will get.
When to Take a Personal Loan?
A personal loan, like any loan, should be something you take only you need it. You should be confident that you can afford to pay it back. If you don't make your payments as agreed, you can harm your credit score and end up facing collection efforts from the lender or a third party collector that may end up in lawsuit, a judgment against you, a wage garnishment, and a bank levy.
Before you apply for a personal loan, consider these options:
- Save money for your big purchases. Plan and create an emergency rainy day fund, as well as a savings and investment account.
- Use collateral for a loan: Secured loans are cheaper than unsecured loans. When purchasing a home or an auto, take out a purchase finance loan. If you have equity in your assets, then look into a cash-out refinance. Some banks offer low-interest personal loans against investment portfolios. Weigh the costs and benefits carefully.
- Use your credit cards wisely. Don’t run up big balances.
- Do a balance transfer with better terms than your current credit card, if you have the strong credit score required. Make sure you don’t miss payments when transferring.
A low-interest personal loan makes sense if you:
- Have other debts, such as credit card debt, at a higher rate.
- Want to clear out your credit card balances into an installment plan, and you don’t have the discipline to optimize your payments.
- Have a specific purchase or emergency bill to pay. Make sure you can afford the loan payments.
If you cannot afford or are struggling to make your payments on your loans and credit cards, then a personal loan is not the solution. It is just adding more weight to a load you cannot carry. If you don’t have good credit and can’t afford the payment, then a responsible lender will not offer you the loan. Even at their best, low-interest personal loans are no bargains. When you have bad credit, then they are expensive and dangerous.
Can't Find a Low-Interest Personal Loan?
If you are struggling with debt and can't qualify for a low-interest loan, then Contact one of Bills.com’s pre-screened debt providers for a free, no-hassle debt relief quote.