How to get a low-interest personal loan: A complete guide

Finding a low-interest personal loan can save you hundreds or even thousands of dollars over the life of your loan.

Whether you’re consolidating debt, covering unexpected expenses, or financing a major purchase, securing a loan with a favorable interest rate can make your financial journey smoother.

But what is a low-interest personal loan, and how can you qualify for one?

In this guide, we detail what constitutes a low rate, where to find such loans, and practical tips to help you qualify for the best terms.

What is a low-interest personal loan?

A low-interest personal loan offers an interest rate below the average compared to typical personal loans.

Generally, personal loan interest rates range from 6% to 36%, depending on the borrower’s credit score, income, loan amount, and term.

Loans with interest rates on the lower end of this spectrum, typically between 6% and 12%, are considered low-interest loans.

Factors such as creditworthiness, debt-to-income ratio (DTI), and market conditions play a crucial role in determining what qualifies as a low rate.

For example, a borrower with excellent credit (a credit score of 720 or higher) is more likely to secure a low-interest rate, while someone with fair or poor credit may face higher rates.

Knowing what constitutes a low interest rate in a personal loan helps you set realistic expectations when searching for a loan.

Where to get a low-interest personal loan

Securing a low-interest personal loan often depends on where you look. Several types of lenders offer personal loans, each with its advantages and considerations:

• Banks: Traditional banks are an excellent option for borrowers with strong credit histories. They typically offer competitive rates, especially for existing customers with a responsible banking history. However, banks often have stricter approval requirements.
• Credit unions: Credit unions are member-focused institutions that frequently offer lower rates than traditional banks. Membership requirements apply, but they tend to be more lenient in assessing creditworthiness.
• Online lenders: Digital lenders like SoFi, Marcus, and LightStream are known for quick approval processes and competitive rates. These lenders cater to borrowers across the credit spectrum, making them a popular choice for securing a low-interest personal loan.
• Peer-to-Peer (P2P) platforms: Platforms like LendingClub connect borrowers with individual investors, offering competitive rates for those who meet qualifications. While P2P loans can be advantageous, they may involve additional fees.

When evaluating lenders, compare their annual percentage rates (APRs), loan terms, and any associated fees. Doing your homework can help you identify the best lenders to meet your needs.

Tips for getting a low-interest personal loan

Securing a low-interest personal loan can make borrowing more affordable, but it requires careful planning.

By improving your financial profile and comparing lenders, you can increase your chances of qualifying for a loan with favorable terms.

Improve your credit score

Your credit score is one of the most significant factors in securing a low-interest personal loan.

Lenders use this score to assess your creditworthiness and the risk of lending money to you. To improve your score:

• Pay bills on time to establish a consistent payment history.
• Lower your credit utilization ratio by paying off existing balances.
• Regularly check your credit report for errors and dispute inaccuracies.

Borrowers with a credit score of 720 or higher are more likely to qualify for loans with rates below 10%.

If your credit score is lower, focusing on improvement before applying can pay off in the form of lower interest rates.

Pay down existing debt

High levels of existing debt may make lenders hesitant to offer you a low-interest personal loan.

A high debt-to-income ratio (DTI) signals that you might struggle to manage additional debt. To improve your chances:

• Prioritize paying off smaller debts to free up more income.
• Avoid taking on new debt while planning to apply for a personal loan.
• Consider consolidating your debt to simplify payments and reduce interest costs over time.

A healthier financial profile not only increases your chances of approval but can also lead to more favorable loan terms.

Research loan options thoroughly

Finding the best loan starts with research. Use comparison tools and resources to explore offers from various lenders. Pay attention to:

• APRs, which include the interest rate and any additional fees.
• Loan terms, as shorter terms typically come with lower interest rates.
• Payment flexibility, such as whether the lender charges prepayment penalties.

Understanding what each lender offers helps you identify those most likely to provide a low-interest personal loan tailored to your needs.

Compare lenders

Don’t accept the first offer you receive. Comparing multiple lenders allows you to weigh your options and choose the one with the most favorable terms.

Consider traditional and online lenders as well as credit unions to find the best deal.

When comparing offers, look beyond the interest rate. Review fees, loan amounts, and repayment terms to get a complete picture of the loan’s affordability.

Taking the time to compare lenders can result in significant savings over the life of the loan.

Look for discounts or special offers

Some lenders offer interest rate discounts for borrowers who meet specific criteria. Common discounts include:

• Setting up automatic payments, which reduces the lender’s administrative costs.
• Bundling loans with existing accounts, such as combining personal loans and savings accounts.

These small discounts can add up, helping you secure a more affordable low-interest personal loan.

Get pre-qualified

Pre-qualification is a valuable step in the loan application process. It allows you to see estimated rates and terms without impacting your credit score.

During pre-qualification, lenders perform a soft credit check to provide a preliminary offer.

This step lets you compare multiple offers and select the one with the lowest rate, making it easier to narrow down your options before committing to a formal application.

Use a co-signer

If your credit score or income is insufficient, having a co-signer with strong credit can help you secure a low-interest personal loan.

A co-signer shares responsibility for the loan, reducing the lender’s risk and often resulting in a lower interest rate.

Choose a co-signer who understands the financial commitment involved, as they will be held accountable if you fail to make payments.

Offer collateral

Secured personal loans, backed by assets like a savings account or vehicle, typically come with lower interest rates.

Offering collateral reduces the lender’s risk, making it more likely that you’ll qualify for favorable terms.

However, be cautious with secured loans, as defaulting could result in the loss of your collateral. Consider this option only if you’re confident in your ability to repay the loan.

Securing a low-interest personal loan is all about preparation and research. By improving your credit score, reducing debt, and comparing lenders, you can position yourself to qualify for the best rates.

Exploring options like co-signers, collateral, and discounts can further increase your chances of obtaining a loan that meets your financial needs.

Ready to take the next step? Dive deeper into what a low-interest personal loan entails by exploring our website for more tips and resources.

With the right strategies, you can achieve your financial goals while minimizing borrowing costs. Looking for more advice? Check out our content explaining how unsecured loans work!