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Loan interest rates - how to get low interest loans

If you're looking for low interest loans you need to think about how much you want to borrow, how long it will take you to pay it back, and where you borrow from.

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Loan interest rates - how to get low interest loans
Loan interest rates - how to get low interest loans

If you want to find a good loan rate then you will need to shop around to find the loan and interest rate that best fits your needs. You can do this with our online comparison tool.

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Compare all sorts of loans from personal loans to debt consolidation loans.

Getting the best interest rates doesn't just depend on which lender you borrow from, but how much you borrow and for how long.

If you took out a personal loan of £4,500, would you expect the interest you pay back to be?

A - Less than if you borrowed £5,000?

B - The same as if you borrowed £5,000?

C - More than if you borrowed £5,000?

You might be surprised to learn that the correct answer is 'C'.

You'd be forgiven for thinking that if you were borrowing less money, you'd get a low-rate loan. That's not always the case.

Why would I pay a high interest rate for a smaller loan?

When you compare the costs of a personal loan, the rates change depending on how much you want to borrow. 

Surprisingly, providers tend to reward higher borrowing on loans under £15,000, so you’d get a much lower rate for a £5,000 loan than you would for a £3,000 one. 

You might think that you wouldn't have to pay high interest rates for a small loan, but lenders set interest rates differently, based on how much risk they think they're taking.

Why are loan rates different?

When a lender is deciding whether to give you a loan and how much interest to charge you, they will look at the risk of you not paying it back and whether they can recover their money. 

There are two main kinds of loans. The first is a secured loan, which is where you put up an asset as collateral – most often, but not always, your house. For instance, a mortgage is a type of secure loan. Because the loan is secured against the overall value of your property. It's seen as much less risky for the lender, so they are comfortable charging a lower interest rate.

If you're borrowing a small amount that's not backed up by an asset, the lender has less certainty that it will get its money back. There’s nothing for them to sell and recoup what they are owed. This second type of loan is referred to as secured loan and the most common form is a personal loan. As there are no assets backing up the loans, lenders tend to not offer the best interest rates. The loans therefore have higher interest rates, even though the sums of money borrowed are much smaller than the average mortgage.

How are loan interest rates calculated?

When a lender like a bank, building society or loan company is deciding how much interest to charge, it will take into account a number of things:

  • How likely you're to pay the money back

  • How much risk the lender is taking in lending to you

  • Whether you have a good track record of keeping up to date with payments

  • How much you want to borrow

  • How long you want to borrow the money for

  • What the Bank of England base rate is

Why are loan interest rates different from what is advertised?

The APR or Annual Percentage Rate is how much a loan will cost over a year and with charges such as arrangement fees factored in. However, the APR you are offered might be different to the rates a provider shows on its website.

In fact, lenders often advertise loan interest rates, but there's no guarantee that you will be offered it on your own personal loan.

That’s because ;enders only have to offer the headline (or representative) APR rate to 51 per cent of successful applicants. Where your credit rating isn't up to scratch, you may not qualify.

Whereas the lucky customers who get that advertised deal are most likely to be those with the best credit rating. Other customers may still be offered a deal, but at a higher interest rate because they are seen as more risky.

The APR that a lender offers you for a loan reflects much risk the company feels it's taking, and how likely they are to get their money back.

Mortgages typically have a high loan amount and lower interest rates, equal to low interest loans. While at the other end of the scale, payday loans are generally for very small amounts, but have huge APRs.

Loan interest rates – how to find the best loan interest rates

When you're looking for a loan, you should start your search by comparing APRs on different loan amounts. You might find that by borrowing more, you can reduce the amount you pay back in interest because you get a lower rate.

An APR is the annual percentage rate, which is the interest rate of the loan plus any costs, such as set up fees.

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

What should I look out for when I compare loans?

Things to look out for when doing a loan comparison include:

  • APR

  • The repayment period (the term)

  • Fixed or variable rate

  • Application time

To find the best loan deals, the APR (annual percentage rate) is one of the most important things to look at.

The APR includes the interest and any extra charges like set up fees. The higher the APR, the higher your repayments.

What factors influence my credit report?

The interest rate on your loan – known as the APR – depends on your personal credit rating. There are a number of factors that influence your credit rating:

  • whether you are on the electoral register and how long you have lived at your current address

  • whether you can show that you are responsible with credit, keep within your borrowing limits and repay on time

  • your credit rating hasn't been affected by county court judgments or other issues around bad debt

  • you have a credit history – if you're very young there may not be much evidence of how you can handle credit, even if you're sensible with your money

  • whether you have any other forms of borrowing – lenders can see if you have made a lot of recent applications for credit from other sources

What is the real rate of interest?

The rate of interest, known as the APR includes the interest rate on the money borrowed, plus any extra fees and charges, such as a set-up or arrangement fee, or a transfer fee if you're moving a debt from one lender to another.

What will I pay when I get a loan?

Within the cost of paying back your loan, there will also be the cost of the set-up fee, plus any additional services, such as insurance.

You will pay a monthly amount as part of the repayment of the loan. Any applicable set up or arrangement fee, will be quoted within the APR.

What can I do to reduce the loan interest rate?

If you want to reduce the loan interest rate there are a number of things you can do:

  • Pay attention to your credit rating – make sure you are on the electoral register and have bills in your name

  • Pay your other forms of borrowing on time – that includes mobile phone bills and TV and broadband packages and credit card instalments

  • Don’t make a lot of applications for credit in a short space of time – this will make you appear desperate for cash

  • Don’t borrow the maximum on all your credit cards – lenders like to see that you are not “maxed out” on your cards

How can I find out more about the best interest rates loans?

You can use our comparison tool to find lenders with low interest rates, and compare which bank gives the lowest interest rate for a personal loan for you.

If you want to get a loan with low interest rate, bear in mind that the best personal loan rates online are available to people with a good credit rating and low risk profile.

You can find out more about loans with our step-by-step guide on how to compare loans.

Compare loans

Compare all sorts of loans from personal loans to debt consolidation loans.