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What is a low-interest personal loan?

When you take out a personal loan, the lender will charge you interest on top of the principal amount owing. As the name suggests, a low-interest personal loan is one that offers a lower-than-average interest rate.

As interest charges significantly impact the overall cost of a personal loan, would-be borrowers may want to consider comparing low-rate options to keep their repayment costs low

However, some low-rate, no-frills personal loans may not come with helpful features, such as a redraw facility. These features may be typically reserved for personal loans that charge a higher rate of interest, as it helps to cover the cost of said perk

It’s important to remember that while searching for a competitive interest rate on a personal loan is important, there are additional factors to consider when choosing your best loan option.

What can you use a low-interest personal loan for?

How can you get a low-interest personal loan?

Personal loan lenders have strict eligibility criteria that you’ll need to meet to be approved for a personal loan. But to be approved for the lender’s lowest interest rate on a personal loan, there may be some additional lending criteria hoops you’ll need to jump through.

While this may vary across each personal loan lender, generally speaking, the following may help improve your chances of being approved for a low-interest personal loan:

1. 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.

2. Secured personal loans

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 common for those seeking personal financing to apply with the same bank they’ve been with their entire lives. After all, they have to approve you if you’re a loyal customer, right? Wrong. Not only will you still need to meet the lender’s approval process, but you may also be missing out on a more competitive personal loan by not comparing your options.

Different personal loan lenders will offer different interest rates and, generally speaking, smaller lenders, online lenders or neobanks may offer more competitive rates on average than bigger banks.  This is because big banks have greater overheads, such as branches, compared to competitor lenders. By reducing these overheads, competitor lenders may be able to pass on the savings to you in the form of lower interest rates and reduced or 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. 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 making additional repayments you’ll help to chip away at the 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.

What are the features of a low-interest personal loan?

While the interest rate set by a lender is one of the biggest factors to consider when choosing a personal loan, it is not the only one. Here are some of the most significant loan factors to compare when searching for your best option:

Interest rate type

There are two types of interest rates: fixed interest rates and variable interest rates. Fixed rate loans allow you to lock in a rate for the loan term. During this time the rate will not fluctuate, offering you more stability in your budgeting and repayments. Plus, you’ll be guarded from potential rate fluctuations, but you will miss out on any rate cuts that may occur.

Variable rate loans are subject to fluctuation as per market conditions and the lender’s decision. If interest rates were to rise, so too would your ongoing loan repayments. If rates were to fall, you would also see your repayments decrease too. Further, variable rate loans are more likely to come with features, such as extra repayments or a redraw facility.

Comparison rate

Comparing personal loan comparison rates may also help you to find the lowest-cost option. While the advertised rate indicates how much interest may be charged, the comparison rate also takes into consideration the interest rate plus many of the ongoing costs, such as monthly fees or service fees.

A comparison rate aims to create a more “realistic” cost for the loan, based on a 5-year, $30,000 personal loan. As your loan size and term may differ, this calculation may not reflect exactly what you’ll be charged for your persona loan. But different comparison rates may be one way to gauge whether your loan options have fewer or greater ongoing fees.

Loan term

Your personal loan term is also crucial in determining how much interest you’ll pay overall. The shorter the loan term (1-3 years) the higher your ongoing payments (weekly, fortnightly, or monthly repayments) will be, but the less interest you’ll be charged over the life of the loan. The longer the loan term (4-7 years) the lower your regular ongoing repayments will be, but the more interest you’ll be charged with over the life of the loan.

Features

Different personal loan offers may offer extra features that could be important to you and how you pay off your loan. Some of these include:

Extra repayments: As mentioned above, one way to pay off your personal loan sooner is to make extra repayments. However, not all lenders will allow you to make additional repayments, and some may charge a fee, while others may offer unlimited extra repayments.
A redraw facility: A personal loan with a redraw facility will allow you to withdraw extra repayments you’ve made and return them to your bank account. This can be handy if you want to pay less interest on your personal loan, but still want access to your money. Keep in mind that not all personal loans come with redraw facilities, and those that do may charge redraw fees.

Fees

As mentioned above, it’s not just the interest charges you’ll need to factor in if you’re trying to find the lowest cost personal loan option. There are a range of fees that a lender may charge you that will contribute to how much you pay for the personal loan, including:

  • Upfront costs (e.g. establishment fees or application fees)
  • Ongoing fees (e.g. annual fees and/or monthly fees, including service fees)
  • Late payment fees
  • Extra repayment fees
  • Early repayment fees/exit fees
  • Redraw fees

What are some other ways to save money with a personal loan?

A debt consolidation personal loan may be able to help you manage other outstanding debts, by combining them all into a single personal loan. With just one regular repayment to manage, with one interest rate and set of fees to think about, you can simplify your budget and potentially save money.

For example, imagine you had two maxed-out credit cards and an outstanding car loan. You’re paying interest plus fees on each of these credit products. By taking out a debt consolidation personal loan, you may be able to clear these outstanding debts all in one go, leaving you with just one loan to manage. This may ultimately save you hundreds, if not thousands, in interest charges across multiple products.

You’ll be charged interest at just the one rate (often a lower rate than what’s charged on most credit cards) and potentially pay just one set of loan fees. This may cost you less per month than managing the three credit products separately and help make your budgeting much simpler.

Keep in mind that if you take out a personal loan with a lengthy loan term, you may pay more in interest on your outstanding debts than you would by paying them off in full separately

Can you get an interest-free personal loan?

While traditional personal loans will always come with an interest rate attached, there may be a way to apply for an interest-free personal loan if you’re struggling financially.

The No Interest Loan Scheme (NILS) offers financing to for individuals and families “on low incomes with access to safe, fair and affordable credit”. It is offered by 170 local community organsations in over 600 locations in Australia.

The NILS is a no interest small loan that may be used to borrow up to $1500 and repayments are made over 12-18 months. While there are no credit checks, NILS loans can only be used to pay for essential goods and services such as:

  • Household items such as furniture, fridges, washing machines, stoves, dryers, freezers, and heaters
  • Medical and dental services
  • Educational essentials such as laptops, tablets and textbooks
  • Car repairs and tyres

You may be eligible to apply through the NILS if:

  • You have a Health Care Card/Pension Card OR earn less than $45,000 a year after tax ($60,000 for couples or those with dependants).
  • You have lived at your current or previous address for at least 3 months.
  • You have the capacity to repay the loan.

How can you compare low-interest personal loans?

There are a range of tools that may help you to compare personal loan options so you can find your best low-interest option, including:

Comparison tables

Comparison tables can be a great place to start if you’re looking for a low interest rate loan. Comparison tables help you to compare apples with apples, so you can view personal loan options side by side and compare then via interest rate. Simply enter the loan amount you want to borrow and the loan term and then filter down your loan options based on the advertised rate.

Real Time RatingsTM

Looking at the Real Time RatingsTM score may be one way to help you narrow down your shortlist of low-interest personal loan options. Real Time RatingsTM is RateCity’s world-first rating system that ranks personal loans out of five, based on loan costs and flexibility. Unlike other comparison pages which rank their products once or twice a year, Real Time RatingsTM results are calculated live, so they are up to date as possible.

Personal Loan Repayment Calculator

Another way to compare your low-interest personal loan options is against how they may suit your budget. Hop on to RateCity’s Personal Loan Calculator to get an estimate of your potential loan repayments to see what the ongoing repayments may look like. You can enter your preferred repayment schedule (weekly, fortnightly, or monthly) as well.

Calculate your low-interest personal loan repayments now

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What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.