Comparing low interest rate personal loans
If you need cash for major purchases, or want to get out of a debt cycle, a low interest personal loan can be the ultimate solution for you. No matter how you intend to use the money, the best personal loans should be able to meet your financial goals. When comparing different loan options, one of the main considerations is the interest rate incurred on the loan. Choosing a low interest personal loan can be the best choice. Other features to check for in low interest personal loans are soft credit checks, fees incurred and if the lender is willing to directly pay your creditors if you want to use the money for consolidating debt. But with many lenders providing personal loans both online and in-store, it can at times be challenging to know where to find a loan with the best rates. Before you apply, it is recommended that you compare the rates from different lenders and only go for a less costly loan.
How to qualify for a low interest personal loan
When it comes to requesting for a personal loan, the interest rates depend on how lenders view you in terms of credit risk. The following factors are considered by lenders to determine the rates.
- Credit scoreYour credit report indicates how your experience with credit has been in the past. Some of the major factors in credit score include amount owed, payment history, and length of credit history. With a poor credit score, chances are that the lender will impose a high interest rate on the loan. This is because lenders risk a great deal when offering the loan to bad credit borrowers. The aim of the high interest rate is to cover up for the risk. On the other hand, having a high credit score is an indication that you are of ‘good character’ and should qualify for a low interest loan.
- Debt to income ratioFor lenders who do not have a minimum income requirement, the borrower’s income is also a major consideration when determining the interest rate. Most borrowers consider your debt -to -income ratio when offering a loan. A debt-to-income ratio is obtained by dividing the borrower’s monthly debt by the monthly income. Lenders believe that borrowers with a low DTI are flexible enough to make monthly payments. They are also less risky, which means that they can qualify for low interest personal loans.
- Loan termIf the loan has a short repayment term, the lender will take less time to lend the money to another borrower. Personal loans with short repayment term usually have a lower rate compared to those that take a longer time to be repaid in full. But as a borrower, it is important to note that a short repayment term means high monthly payments. You therefore should only take out the loan if you can afford the monthly payments.
Applying for a low interest personal loan
After comparing lenders and finding the best personal loan that you are eligible, you have the option of applying for the loan either online or instore depending on your lender. With personal loans online, most lenders have prequalification options.
This will give you a clear picture of the interest rate you are eligible for. After submitting your application, the lender will review your details and pull a hard credit check. At this point, you will be required to provide additional documents including bank statements, pay stubs and tax forms. If your online personal loan is approved, the money will be electronically transferred to your account. Repayment is made on a monthly basis. You can also repay the loan in lump sum if the lender does not impose any prepayment penalties.
Benefits and drawbacks of personal loans
- SavingsIf you take out a low interest loan with a shorter loan term, you will end up saving huge amount of money on interest
- Easy processWith technology, getting online loans for bad credit is now easier and faster. There are also lenders who provide apps, making it easier for individuals to apply for a loan with a mobile gadget. If you work with online lenders, the money will be wired to your bank account in less than 24 hours.
- Repayment flexibilityWith personal loans, you can make payment depending on your schedule. You can either make weekly or monthly payments depending on your agreement with the lender. Some will allow you to repay the loan early with no extra fees.
- Used for variety of purchasesThe fact that you can use a low interest personal loan for various purposes makes the loan attractive. You can either use a personal loan to start a business, renovate a home, buy a car, and cater for emergency expenses, among other reasons. With other loan types, there may be restrictions on how the funds should be used. Personal loans, on the other hand, are more flexible.
- Smooth your cash flowYou can also use a personal loan to bridge a temporary gap. If you have a client whom you think may not pay on time, taking out a personal loan can be the best option.
One way to spend a personal loan is by getting a personal line of credit rather than repaying the loan in installments. With personal lines of credit, you will incur a lower rate of interest. It also makes it easier for you to cover for unexpected expenses.
- Prepayment penaltiesYou also need to find out if the lender has prepayment penalties if you intend to repay the loan before time.
- ScamsAdvancement in technology comes with a whole lot of benefits. But it also has its own drawbacks. Among them is the increasing rate of scammers when you apply for an online loan. Before requesting for a low interest personal loan online, ensure that you are working with a reputable lender by contacting Better Business Bureau or the Federal Trade Commission.
- Poor credit is a problemWhen applying for a personal loan with poor credit, it can be quite challenging for you to get the loan. However, you still have the option of applying for a secured loan.
Tip: Every lender has their own requirements and different pricing models. It is therefore important that you compare rates from different lenders. The rate of interest between lenders (even when you have an attractive credit) can be substantial. As long as you only look for lenders who use a soft credit pull, you can easily check your rate without interfering with your credit score.
Uses of low interest personal loans
Considering that the loans attract a lower interest rates, there are several ways in which you can use the money. In fact, the flexibility nature of the loan is what makes it popular among borrowers. Here are some of the ways you can use a low interest personal loan:
- Cover an emergencyEmergency always happens and even if you may not be prepared when it comes your way, taking out a personal loan can be the best solution. Whether it is an urgent car repair or an unexpected hospital bill and you do not have enough money in your savings account, a personal loan can help meet your needs.
- Debt consolidationDealing with multiple debts can be overwhelming. This is especially when the loans are from multiple lenders with different repayment dates. The good thing is that you can request for a low interest personal loan to consolidate other debts. Instead of dealing with different creditors every month, you will only have a single loan to pay. Some advantages of debt consolidation is that it can lower your interest rates, reduce the time it takes to pay your debts and also reduces the amount you spend when paying multiple loans on a monthly basis.
- Make home improvementsWhether you are renovating your home or rebuilding it after a natural disaster, taking out a personal loan is the best way to go. Personal loans are unsecured in nature and you won’t have to worry about putting your home at risk.
- Pay for a weddingIf you are planning to tie the knot, a personal loan will relieve you of the budget. The loans have flexible repayment terms which means that you can repay the money over a period of time.
- Improve your credit scoreWhen you repay the loan on time, lenders will send your report to several credit bureaus. This helps improve your score. But don’t forget that failure to repay the loan on time will negatively affect your credit score.
- Education expensesThe cost of college education can be expensive and especially if you did not start saving on time. In this case, a low interest personal loan can come in handy. The loan will not only cover the tuition fee, but also cater for other types of education expenses.
Impact of personal loans on credit score
Before approving your loan, among the things that lenders consider is your credit card utilization. This is the ratio of the borrower’s credit card balances to credit limits in a given month. If the borrower’s credit card utilization is too high, you will be considered as a higher risk borrower. At your closing date, the lender will send your credit card report to credit bureaus. Your credit card utilization can be managed by paying down your balance early or reducing your spending habits. You can also replace your credit card debt with a low interest personal loan to improve your credit score. This is because personal loans are installment loans with a fixed repayment term. On the other hand, credit cards are revolving loans with no fixed term of payment.
Types of low interest personal loans
- EarnestEarnest APR ranges between 5.49 and 18.24%. This means that you will be able to qualify for a loan even if you have a poor credit score. Although income requirement is not considered, you are required to have a minimum credit score of 660 to qualify for the loan. Borrows can apply for funds from as low as $2000 with a maximum amount is 50,000. The repayment period is between 2 to 3 years. Lenders are not restricted on how to use the loan. Earnest does not incur any penalties on the loan.
- SofiSofi is commonly known for refinancing a student loan. When it comes to personal loans, Sofi also offers the lowest rates and borrowers with good credit score can qualify for an annual percentage rate of 14.87%. For your loan to get approved, you should earn a yearly income of $50,000. The loan amount ranges from $5,000 to $100,000 with a repayment period of three, five and seven years. There are no prepayment penalties or origination fees. If you pay the first 3 loans on time, you will be eligible for late-fee forgiveness.
- UpstartIf your credit score is not attractive enough, you can still qualify a personal loan with Upstart. However, you will have to pay higher interest on the loan. Borrowers with good credit qualify for the lowest rates of between 7.73% and 29.99%APR. For you to qualify for an Upstart personal loan, you should have a credit score of 620 and a minimum annual income of $12,000. You can borrow a loan amount of between $1000 and $50,000 with no restrictions on how the funds should be used. However, you will have to incur an origination fee that ranges from 1% to 8% of the loan balance. Upstart also charges a late payment fee of 15% or 5% of the due amount. However, there are no prepayment penalties charged.
- Citizen BankWhen it comes to applying for a personal loan online, you will benefit from lower interest rates since online lenders do not have any branch maintenance costs. But despite being a traditional bank, Citizen Bank offers attractive rates. The bank APR range is 5.99% to 18.99%. You need to have a FICO score of 680 and annual income of $24,000 to qualify for a personal loan with Citizen Bank. The minimum loan amount is $5,000 with a maximum amount of $50,000. The repayment period is between 3 and 7 years. The bank does not impose any prepayment penalties but late payments attract a fee of 5% of the remaining loan amount.
If you want to request for a personal loan with LendingClub, you need to have a good credit score for you to qualify for low interest rates. The loan has an APR of between 5.99% and 35.89% depending on your credit score. However, LendingClub does not have any income requirements. The repayment period is between 3 to 5 years. You also have to pay an origination fee of 1% to 6% and a late repayment fee is 5% of the due amount or $15.
If you decide that a personal loan is the best option to meet your short-term financial needs, it is important that you look for a fixed rate loan. While most lenders provide personal loans with fixed rate agreements, others may not and it is therefore prudent that you read the fine print. Your credit score is also an important consideration when taking out a personal loan. As much as you can still qualify for a personal loan with poor credit, lenders will require you to have an attractive credit score for you to qualify for higher loan amounts. If you have a good credit profile, chances are that you will qualify for an affordable loan.
Potential risks involved in a personal loan
Compared to credit card debts that can be paid over an undetermined period of time, personal loans are paid over a fixed period. If you do not pay off the loan within the agreed upon time limit, it will have a negative impact on your credit score. Since personal loans are unsecured, you will not lose any of your assets. However, you may not qualify for a personal loan in future. Some lenders also impose prepayment penalties if you repay the loan before the agreed date. Finally, you also should beware of scammers who can lure you by fake adverts. You should especially take note of lenders who will need you to pay an upfront fee. Once you pay the money, they will disappear together with your sensitive information.
One of the most popular ways to get out of debt, pay for emergencies or purchase equipment is by taking out a personal loan. A personal loan allows you to borrow a certain amount of money and repay the debt in fixed monthly payments. For you to qualify for a personal loan with low interest rate, you need to have a clean credit history. When looking for the best low interest personal loan, it is important that you pay attention to APR to avoid getting into a bad credit personal loan trap.