Understanding personal loans is the first step to understanding how to find the best interest rates for your personal loan. Take a look at our articles about personal loan myths, ways to use personal loans, and how to pay back personal loans for some baseline information.
Once you decide that a personal loan is right for you, you may want to consider how to find a loan with the best interest rate. We’ve outlined some helpful tips to guide you in this process.
Determine How Interest Is Calculated
Start by learning how your interest is calculated so that you can understand how much the loan will cost over time. Different lenders may calculate interest rates in different ways, so while some rates may look low at first glance, you may end up paying a higher rate at the end of the term.
As the name suggests, the interest rate on fixed-rate loans will remain the same over time. This means that the monthly repayment rate will remain the same, too (except under very specific conditions), though fixed interest rates tend to be slightly higher than variable-rate loans.
Variable-rate loan interest rates start lower, which may seem more attractive. They are, however, linked to the changing economic climate and can go up or down at any time. You may have to adjust your budget if the interest rate fluctuates on a variable interest loan. As such, fixed-rate loans are usually a safer option since you know your interest rates will remain constant no matter the market’s movement, ensuring your budget remains constant, too.
Decide on a Secured or Unsecured Personal Loan
Both secured and unsecured personal loans have the same main advantage: money in your pocket.
But secured loans tend to have lower interest rates since you’re offering up an asset as collateral, such as a property or a vehicle. That means there is less risk to the lender that you’ll default on your loan since you lose your collateral if you do.
That said, if you don’t have an asset to offer – or that you’re willing to offer – as collateral, you can apply for an unsecured personal loan. The higher your credit score, the lower your interest rate, so it helps to boost your credit score before applying for an unsecured personal loan.
Consider Offers and Interest rates
You can make an informed decision by using any of the aggregator platforms that are available today. Once you understand your eligibility and requirements, visit a financial website that compares different lenders offering personal loans.
Also, remember that the importance of a good relationship with your lender cannot be overstated. So do not hesitate to call your bank or a non-banking financial company (NBFC) if you have a long-standing relationship. Sometimes, they can tailor a plan for you based on your needs.
Most people will need to take out a personal loan at some stage, so understanding how to choose the lowest possible interest rate will make the entire loan process that much easier and more affordable.