Personal loans come in all shapes and sizes. They are available from direct lenders, banks, and credit unions. They charge slightly higher interest rates than secured loans as lenders cannot repossess your personal assets in case of default.
Before choosing a personal loan, compare interest rates to choose the most affordable deal. Whether you are applying through a broker or directly from a lender, comparison is the key to the lowest possible interest rates.
Interest rates vs APRs
Before embarking on researching less expensive offers, you must know the difference between interest rates and APRs (Annual Percentage Rates). The latter includes interest rates along with fees and other charges.
An APR determines the annual cost of a loan. Even though you have to settle your debt within a short period of time, say a month, figure out the affordability based on the annual cost of the loan.
Annual percentage rates are always way higher than interest rates, not because they consist of fees and associated charges. The compound effect of interest rates significantly increases the annual cost of the loan.
Most borrowers focus on interest rates to compare deals, but they fail to realise that they have to pay fees as well. Further, if you fail to settle the account on time, late payment will incur additional charges and interest penalties, which significantly increase the total cost of the debt.
If you carry the debt for a full year, you will incur additional charges based on the APR.
Representative APRs
No lender can reveal the actual APR without perusing your credit score. This varies by your credit score and financial circumstances. APRs provided on comparison websites and lenders’ websites are not actual APRs. They are rather representative APRs.
A representative APR is an advertised interest rate and fee cost that at least 51% of successful applicants receive for a loan. This is not the lowest APR. It is designed to let you fairly compare loan products across lenders.
Bear in mind that it is not the guaranteed APR. The actual cost is determined based on your creditworthiness. You may end up with a higher APR. Lower APRs than the representative rate are generally available to borrowers with excellent credit profiles.
Ways to choose the best personal loan rates
Here are the ways to choose the most affordable rates for personal loans:
Understand loan tiers
Interest rates vary by the loan amount. For example, interest rates for personal loans up to £5,000 will be higher than personal loans ranging between £5,001 and £7,500. The smaller the loan size, the higher the interest rate. For instance, personal loans up to £1,000 charge exorbitant interest rates as compared to a £5,000 loan.
It, however, does not insinuate that you should borrow more than you need. Of course, there is no point in borrowing £5,000 when you only need £1,000, but if your borrowing amount is near the threshold of a higher tier, it might be worth borrowing slightly more to save money on interest.
Before choosing to borrow additional funds, you should compare the cost of the loan in both scenarios. Sometimes, additional funding can outweigh the savings on interest payments.
Check your eligibility
Do not rush to a personal loan lender without taking a look at your credit report. Your credit score plays a paramount role in getting the best rate on personal loans in the UK.
If your credit score is stellar, you will certainly be able to qualify for lower interest rates. Before applying for a personal loan, you should carefully assess your credit report. Make sure that your credit rating is not lower than the bare minimum score that lenders accept.
Try improving your credit score before applying for a personal loan. Make sure that there are no inaccuracies in your credit report.
Get pre-approval letters
Pre-approval letters will let you know quotes from various lenders without affecting your credit score. If you do not want to get into the hassle of applying to different lenders, contact a broker. They will help you receive quotes from different lenders by submitting only one application.
The best part about preapproval letters is that you can easily compare interest rates, APRs, loan amounts, and repayment schedules and make the right choice. However, it is vital that these are estimated rates, not actual ones. Actual rates are proposed when you formally apply for a loan from a lender of your choice. At that time, lenders run affordability checks, which include perusal of your credit report and income sources.
Reduce your current obligations
If you currently owe too much debt, lenders will be sceptical about your repayment capacity. Lenders generally consider evaluating your debt-to-income ratio. This informs them of how much debt you currently owe.
Taking out a personal loan will make it harder for you to keep up with repayments if you already owe too much debt. Since the default risk becomes high in this scenario, lenders will restrict the loan amount and charge very high interest rates.
An ideal debt-to-income ratio is 30%. The lower, the better.
Avoid short-term high-cost loans
It is vital to avoid short-term high-cost loans if you want to save money on interest. Small emergency loans are also a type of personal loan, but they come with a very high APR. You should avoid using these loans unless you come across an unavoidable expenditure.
Try saving money instead. Even though your income is not high, you should try to consistently set aside a small amount of money every month. This will help you grow an emergency cushion that you can dip into during emergencies.
The bottom line
Choosing the best personal loan rates in the UK does not have to be complicated at all. Receive pre-qualification letters from different lenders. They can let you compare rates without affecting your credit score.
Try to reduce your current obligations. Your chances of getting approval are quite high when you do not owe too much debt. Personal loans are expensive even if your credit score is good. You should use them only when you can afford to pay them back.
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