Borrowing money shouldn’t cost an arm and a leg. That’s why many people consider low-interest loans for their next big purchase, debt consolidation, or other borrowing needs.
A low annual percentage rate (APR), can mean a low monthly payment, while paying less to borrow, and potentially paying down the loan faster than a moderate interest option. Find out how a low-interest loan can work in your favor and how to get one.
How to qualify for a low-interest loan
Before you can get a low-interest loan, you’ll need to qualify, which depends heavily on your credit profile. Most lenders use a combination of your credit history, employment, and income to determine how much risk you pose of not repaying your loan.
The lower your risk level, the lower your APR. Lender consider these factors when qualifying you for a low-interest loan:
- Credit history: Lenders assess how you’ve handled loan payments previously by reviewing your credit history. This review goes beyond your credit score to address aspects like your credit utilization, payment history, age of accounts, and how many accounts you have.
- Debt-to-income ratio (DTI): Your lender adds up your monthly debt payments and divides that number by your pretax monthly income to get a percentage. This ratio tells lenders how much you can comfortably borrow. Experts suggest keeping your DTI at 36% or less.
- Employment history: Your lender considers itself more likely to get its money back when there’s a consistent employment history. Some lenders require solid employment of at least two years.
- Consistent income: Most lenders require consistent income to qualify you for a low-interest loan. Sometimes, lenders may request your last two pay stubs or bank statements to verify your income.
How to apply for a low-interest loan
Applying for a low-interest loan starts before the loan application. For the best possible interest rate, you’ll want to take these two preliminary steps before applying.
- Review your credit report: Know where your credit stands so there are no surprises after applying. If you notice anything inaccurate on your credit report, file a dispute with each credit bureau to have the error removed.
- Prequalify: With some lenders and loans, you can prequalify before completing an application. Prequalification lets you check your potential interest rate, loan term, and loan amount without a hard inquiry. Prequalify with multiple lenders to find the lowest interest rate. It’s important to note that your final rate may not be the one you prequalified for.
- Provide your personal information: Fill out your name, address, income, employment, Social Security number, and any other requested information within the application. If you are already prequalified, this is usually prefilled with your information.
- Select the loan options you’d prefer: Choose the loan amount, how long you’ll repay, and the APR option that works best for you. Make sure the payment amount fits within your monthly budget.
- Upload any requested documentation: As part of the loan process, you might need to supply proof of income, tax returns, bank statements, or other paperwork to verify your eligibility.
- Submit the application: Check to make sure your info is correct, then hit submit to complete your application. The lender will run a hard credit inquiry, which can temporarily lower your score by a few points, and review your information and documentation before a final decision.
- Wait for a decision: Some low-interest loans get approved within a few minutes. Others may take days or weeks for approval after some back and forth with underwriting. A secured loan may take slightly longer, especially if it’s a mortgage or home equity loan.
- Use the money: If approved for the loan, you’ll get the funds as a deposit to your account, a check, or a payment directly to your purchase. Some personal loans provide funding as soon as the next day, but you typically won’t wait more than a week.
- Repay the loan: Time to make good on your agreement! Make payments to your loan on or before the due date each month to keep the loan in good standing.
Learn More: How To Apply for a Personal Loan
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
How does a low-interest loan work?
A low-interest loan is an installment loan that charges an annual percentage rate as close as possible to the prime rate (the base rate at which a bank lends money). The current prime rate is 8.50%, according to The Wall Street Journal.
The annual percentage rate is how much you’re paying to borrow money in both interest and fees in the form of a percentage. The higher it is, the more you’re paying.
Getting a low-interest loan can save you money, reduce your loan payment, and may enable you to choose a shorter payoff date. However, you’ll need to meet a few qualifications first.
- Good to excellent credit history
- Consistent income
- Consistent employment
- Healthy debt-to-income ratio
Without these factors, you could get approved for a much higher APR on your loan or get declined altogether. Another determining factor of your rate is whether your loan is secured or unsecured.
Secured loan
Secured loans protect the lender by using a valuable asset as collateral, which can include your house or your car. These loans are sometimes limited to specific purposes. Secured loans include auto loans, mortgages, and home equity loans.
If you stop making payments as agreed, your lender can repossess the asset backing the loan. Since these loans are considered less risky for the lender, there’s typically a lower interest rate than unsecured loans.
Unsecured loan
An unsecured loan doesn’t require any collateral. Instead, you sign the loan agreement and promise to repay the amount borrowed, plus interest. Personal loans are typically unsecured. The interest rates on unsecured loans tend to be slightly higher than on secured loans.
Low-interest loans vs. no-interest loans
If you’ve ventured into a car dealership, appliance store, or jewelry shop offering a no-interest loan for your purchase, it might seem like a fantastic deal, especially if they’re enticing you with an offer on something you need.
However, no-interest loans often carry heavy penalties, strict repayment schedules, and high credit score requirements. When weighing between a low-interest loan and a no-interest loan, these are the main differences you should consider.
- Promotional period: No-interest loans usually have a promotional APR of 0%, but if you don’t pay off the balance in full by the end of the period, your balance will be charged at the standard rate.
- Prepayment penalties: Most low-interest loans don’t have prepayment penalties, but it’s more common for no-interest loans to have these fees built into the loan.
- Late payments: Making a late payment on a low-interest loan might earn you a late fee, but with a no-interest loan, one late payment could end the promotional period.
- Origination fees: Low-interest loans often have an origination fee of 3% to 10%, but no-interest loans typically don’t.
A no-interest loan could work well for a smaller purchase you plan to pay off before the promotional period ends. You’ll also need discipline to make the payments on time and stay within your original budget.
Low-interest loans are a better choice for a purchase that might take longer to pay off. If you plan to pay off the loan before the maturity date, these may also be a better option since prepayment penalties are less common.
Alternatives to low-interest loans
If you don’t qualify for a low-interest loan, there are several alternatives that could help you get the financing you need.
- Find a cosigner: If you can’t qualify for a low-interest loan by yourself, consider adding a cosigner with better credit to your application. Their credit score could help you get the loan. Stay current on payments, as missed and late payments impact you and your cosigner. Also, not all lenders accept cosigners, so be sure to research those that do.
- Repair your credit and try again: Denied due to credit issues? Use this opportunity to improve your credit over the next few months by paying off debt, making on-time payments, and disputing errors.
- Get a loan without low interest: Depending on your credit score, you could still qualify for a loan with a moderate APR. As of September 2023, people with scores of 780 or higher had the lowest average three-year personal loan rates (10.98%), and people with scores from 680 to 719 had average interest rates of 19.86% on the same loans.
- Use collateral: If you can’t qualify for an unsecured loan, using collateral could shift the odds in your favor and net you a lower interest rate.
- Sign up for autopay: As an added incentive to pay your loan each month, some lenders offer an autopay discount, usually 0.25 percentage points. Signing up for autopay could bring your APR closer to what you’d prefer.an with bad credit is to find a cosigner with better credit than you.
FAQ
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