How to Qualify for Low Interest Personal Loans
Whether you need a personal loan to pay for an emergency, to fund a once in a lifetime opportunity, or to finance a home renovation project, you want a low-interest rate. If you get stuck with a high-interest rate, you'll find the amount that you pay back is significantly higher than what you'd expect.
While you're seeking the right lender, you also want to review the terms to ensure you find the best low-interest personal loan for your needs. To learn more about what a low-interest personal loan is and how to increase your odds of qualifying for one, keep reading.
What Is A Low-Interest Personal Loan?
The interest rate on a personal loan can range between 5% and 36%. That difference significantly impacts your monthly payment and how much you pay back in total. A low-interest personal loan allows you to pay less to your lender for borrowing the money.
Here's an example that will clearly outline what a low-interest personal loan is and how it impacts your borrowing experience.
You're taking a vacation this summer that will cost you $10,000, so you decide to get a personal loan to cover the costs.
Credit Union A offers you an 8% interest rate and Credit Union B offers you a 23% interest rate.
With all other details being equal (60-month term and 5% origination fee), here's how your loan will differ.
Credit Union A - 8% Interest Rate
- Monthly Payment - $202.76
- Total Payments - $12,165.84
- Total Interest - $2,165.84
Credit Union B - 23% Interest Rate
- Monthly Payment - $281.90
- Total Payments - $16,914.28
- Total Interest - $6,914.28
In this case, a higher interest rate more than doubles the amount you pay in interest. So, when borrowing the same amount of money, you pay almost $7,000 in interest compared to a little over $2,000.
Who Qualifies For A Low-Interest Personal Loan?
Now you might be wondering why some people can get a loan with a 5% or 10% interest rate, while others are paying thousands more in interest.
It all comes down to a lender's belief in your ability to repay on time and in full.
The primary way creditors determine this is by viewing your credit score. Your credit score lets the lender know the type of risk they're taking by loaning you money.
A lower credit score indicates that you're less likely to pay back your loan on time or in full. For that reason, you are charged a higher interest rate, which allows the lender to get more money upfront in case you don't follow through with the agreement.
However, if you have a high credit score, a lender assumes that you're more likely to be responsible with your payments and will, therefore, loan you the money without charging too much in interest.
How To Qualify For The Best Low-Interest Personal Loan
If you want to save money when getting a loan, you should strive to get the lowest interest rate possible. This isn't something that happens by chance.
Here are a few steps you can take to improve your credit score and increase the odds of you qualifying for one of the best low-interest personal loans.
Review Your Credit Score
The first thing you want to do when attempting to qualify for a low-interest rate personal loan is to review your credit score. You can do this by pulling your official credit report from TransUnion, Equifax, or Experian.
Look at your report to see if there are any inaccuracies, judgments, high balances, etc. Then take the necessary steps to improve those things if possible. That might include paying off or paying down your credit card balances to decrease your utilization rate, settling with creditors, or having mistakes corrected.
Calculate Your Debt To Income Ratio
Along with reviewing your credit score, your lender will calculate your debt to income ratio. If you have a high debt to income ratio, you might not qualify for a loan because you don't have enough wiggle room in your monthly budget for additional debt.
To calculate your debt to income ratio, you can use an easy, online calculator or do so manually. All you have to do is calculate your monthly debt payments and divide the total by your monthly gross income, which is what you make before taxes.
Get a Cosigner
When you don’t have a stable credit history or you lack credit, you will likely be given a higher interest rate or be unable to qualify at all.
One way to improve your odds of qualifying for a low-interest personal loan is to get a cosigner. If you can find a friend, family member, or significant other with a strong credit profile to be a cosigner, the lender will consider both of your profiles together to determine what you can qualify for.
Review Your Options
You might be hesitant to apply for multiple loans because it can negatively impact your credit score. The good thing is that as long as you apply within a certain period (generally 14 to 45 days), you will only get one hard hit on your credit.
Taking the time to shop around allows you to compare your options and find the best low-interest rate personal loan. Also, check other details such as origination fees, the term, etc.
Are You Ready To Find The Best Low-Interest Personal Loan?
Now that you know what a low-interest rate personal loan is and how to improve your odds of qualifying for one, it's time to get the process started.<
At OUCU Financial, we work together to help you find a personal loan that fits both your budget and your financial needs.
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