Personal loan lenders often have strict eligibility criteria that you’ll need to meet to be approved for a personal loan. To be approved for the lender’s lowest interest rate on a personal loan, you may have to jump through a few hoops and fit certain standards.
This can include having a good to excellent credit score, maintaining a lower debt-to-income ratio, and demonstrating a positive payment history. Meeting these standards can enhance the likelihood of loan approval. Additionally, it establishes you as a reliable borrower, potentially allowing you to access more favourable terms, such as lower interest rates and higher loan amounts.
While eligibility requirements may vary between personal loan lenders, generally speaking, the following may help improve your chances of being approved for a low-interest personal loan:
1. Possess an excellent credit rating
Having a good to excellent credit score is one of the major criteria set by personal loan lenders to be approved for financing. While having a good credit score may still see you approved for a loan, the stronger your credit history and credit score, the more likely you may be approved for a more competitive interest rate.
Lenders reserve their most competitive personal loan interest rates for “ideal” borrowers, meaning those who carry the least amount of risk of default. This is also true of home loan lenders and other financial service providers. Having an excellent credit score is one way to boost your chances of nabbing a low-rate personal loan. If you’re unsure about your credit score, you can visit RateCity’s credit score hub to check it for free.
If you find your credit score is low, it could be challenging for you to qualify for a low rate personal loan. Applying for multiple loans to see if you could get lucky with at least one could cause your credit score to take further hits. Multiple loan applications could reflect poorly on your credit history, making it challenging to qualify for credit products.
If your credit score isn’t as high as you expected, you may want to wait and work on improving your credit score. This can increase your chances of securing a competitive interest rate in future and improve your overall financial health. However, if you need money urgently, you may not have the luxury to wait for your credit score to improve before applying. In such a situation, you could explore other ways to strengthen your loan application, such as applying for a joint personal loan or opting for a secured loan.
2. Consider taking out a secured personal loan
Not all personal loans are created equally, and the type of personal loan you choose may influence the interest rate you’re offered.
A secured personal loan is one that uses an asset, such as a vehicle or jewellery, as collateral to secure the loan. In the even you default on the loan the asset will be seized. This scenario reduces the risk to the lender that this could occur as you’re less likely to miss a repayment if your asset is on the line. This is why secured loans generally come with lower interest rates on average.
Comparatively, an unsecured personal loan will allow you access to the same amount of funds without securing an asset as collateral. There’s no risk that the lender could seize your asset if you defaulted on the loan, but it’s more likely the lender may offer you a higher interest rate on average.
3. Compare lenders
It's a common practice for individuals in search of personal financing to stick with the same bank they've been loyal to for years. The assumption is that loyalty guarantees approval, but that's not the reality. You'll still need to meet the lender's approval criteria, and you might be overlooking the possibility of a more competitive personal loan by not exploring other options.
Various personal loan providers offer different interest rates, and in general, smaller lenders, online lenders, or neobanks tend to provide more competitive rates on average compared to larger banks. This is because major banks often carry higher overhead costs, including maintaining physical branches, which competitor lenders can minimise. By reducing these overheads, competitor lenders may pass on the savings to you in the form of lower interest rates and reduced or even waived fees.
The rate you are offered will still depend on your personal financial situation and credit history. But it’s a good reminder to shop around and compare your options to ensure you’ve found the best personal loan for your goals and budget before signing on the dotted line.
4. Make extra repayments
You may be able to reduce your overall interest charges by making additional repayments. The ability to make extra repayments is a personal loan feature some lenders may offer you. By taking out a loan that allows for additional repayments you’ll have the opportunity to chip away at your loan principal faster, shortening the loan term. This may help to reduce the amount you pay in interest repayments over time, as the shorter your term, the less interest charged overall.
However, you may find the lender charges a higher rate than a more basic loan option for the perk of having said feature. In this case you may want to ensure you have budgeted to make additional repayments to make the most of this feature.
5. Consider applying for a personal loan with a guarantor
Lenders typically reserve their lowest rates for low-risk borrowers who are less likely to default on the loan. Having a guarantor on your personal loan lowers the level of risk to the lender, which may lead them to offer you a more competitive interest rate.
A guarantor is another person who agrees to assume the responsibility for the loan in case the borrower defaults on it. Most lenders allow parents to act as guarantors for their children, but some lenders may be a little more relaxed and accept other relatives (and sometimes, though rarely, even friends and colleagues) as guarantors.
Before you proceed with this option, make sure that you can afford the repayments. It’s crucial to remember that if you happen to default on the loan, the guarantor is likely to be held responsible for the outstanding amount. In the unfortunate event that the guarantor is unable to service the loan, it could lead to default, which may prompt the lender to take legal action.
6. Choose a shorter loan term
Choosing a shorter loan term can lead to lower interest rates. While monthly payments may be higher, lenders often offer better rates to borrowers who opt for a shorter loan term. This is because the loan is paid off sooner, reducing the lender's risk.
7. Negotiate with different lenders
When it comes to securing a better interest rate, don't shy away from negotiating with lenders. If you boast a strong credit history or have built a long-standing relationship with a financial institution, you may have room for negotiation. Approach this process politely, presenting your case for a lower rate. Lenders may be open to accommodating your request, particularly if they view you as a low-risk borrower. Negotiating can be a worthwhile endeavour, potentially saving you money over the life of your loan.