A low-interest loan is one that offers a lower than usual rate of interest, making borrowing more affordable. That's because lower interest rates mean lower monthly repayments. They also reduce the overall cost of borrowing as you’ll pay back what you owe more quickly.
Lenders take lots of factors into account when deciding who is eligible for a low-interest loan. These include:
How much you want to borrow
Your income and financial history
Your credit score
The rate a lender offers you could be lower than the advertised rate - you need a strong credit score to access the best low-interest loans. If your score is poor, you could be offered a higher rate than the headline one you saw on a website or advert.
As with most types of financing, your credit history plays a vital role in the interest rate you’ll be offered on a loan. Put simply, the better your credit history, the more likely you will be offered cheaper loans with lower interest rates.
If you have bad credit, you may find it difficult to get a low-interest loan. In these circumstances, you may need to consider a bad credit loan. This type of loan is offered by a smaller pool of providers who are likely to limit the amount you can borrow and charge a higher rate of interest than standard loan companies.
Another alternative is to see if someone else – typically a family member or close friend – would be willing to guarantee making repayments on your behalf if you can’t. If this is the case, you may be able to get a guarantor loan. This can reduce the interest rate you pay as the bank or building society will be taking on less risk, but guarantor loans are still typically more expensive than standard loans.
The better your credit history, the more likely you will be offered cheaper loans."
The interest rate is the most important number you need to consider when taking out a loan. This rate tells you, in percentage terms, how much interest you’ll pay on what you borrow. It is shown as an annual percentage rate (APR) which gives you the total cost of borrowing for a year.
As you can see from the graph below, the interest you pay overall can be affected even by small changes to the APR. Whatever the rate, you’ll also pay more interest the longer you take to pay off your debt.
The graph shows how the APR can affect the interest you’ll pay on a loan of £5,000 over 2 years.
Based on a loan of £5,000 over a term of 2 years.
Low-interest loans can be a good option in the right circumstances, but it's always worth considering if another form of finance might better suit your needs. For instance, a 0% credit card might be a better option, as long as you can pay back what you owe in the introductory period.
A credit card that gives you 0% interest on purchases is likely to be the best way of borrowing, provided you're disciplined enough to pay off your entire balance within the 0% interest period. That means you can borrow the money without paying any interest at all.
Think carefully about how long you need to pay back the borrowed amount and then choose the card that fits your needs - some cards have interest-free periods that last up to 22 months.
Another option would be to do a balance transfer to another 0% credit card when the interest-free period ends. As you might expect, you need a healthy credit rating to use a credit card in this way. After all, you can only get access to 0% cards with high enough limits if you have a solid credit history.
Even if you can’t get a 0% purchase or balance transfer card. It’s worth shopping around to see what rates you’re offered, and how they compare to loan APRs.
It stands for annual percentage rate, which is the interest you would pay on the total value of your loan over a year. It typically includes arrangement fees. The lower your APR, the lower your interest payments.
All the unsecured loans in this comparison offer fixed interest rates, so the amount you pay will stay the same throughout the term.
Applying online can take minutes if you have your details ready. However, some secured loan applications take longer as the lender has to value your property first.
Yes, you can get a loan even if you have a low credit score. However, you are unlikely to be offered a low-interest loan, and you may need to apply for a specialist bad credit loan or guarantor loan. Taking steps to improve your credit rating will improve the interest rates you’re offered.
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