Low-Interest Loans and How to Qualify for Them

Low interest loans are advantageous in many ways, as these loans cost you less throughout the life of the borrowing period than they would if you received a higher interest rate for the same type of loan. Getting a lower interest rate on your personal, automobile or home loan means you will pay less in loan financing fees over time, while receiving a high interest rate means you will pay more on the loan in the long run.  

The interest rate you receive when borrowing money from a lender will vary depending on several factors, such as the loan type and your credit score. For instance, low interest personal loans typically offer you an interest rate of less than 12 percent, while low interest car loans can range between 3.6 and 8 percent. When applying for a car loan, the interest rate you receive will vary depending on your credit score, the age of the vehicle and the term length of the loan.

Review the information below to learn more about low interest rates and how to qualify for them when borrowing money from a lender.

What does it mean to have a low interest loan?

Loan interest rates can range from 0 to 200 percent, depending on the loan type, the amount of money you wish to borrow, the term length of the loan and your credit score. However, having a good credit score and borrowing history can get you a lower interest rate on your home, automobile or personal loan.

With a low-interest loan, you pay fewer financing fees throughout the term of the borrowing period. As a result, you can repay the loan in less time. For instance, the average interest rate for an auto loan can range from 3 to 10 percent. With a credit score of between 690 and 850, however, you may qualify for a low interest rate of around 4.28 percent. With a credit score of between 620 and 689, the average interest rate increases to about 8.37 percent.

Moreover, the amount of money you pay in interest varies depending on whether you receive a fixed or variable interest rate. Fixed loan interest rates remain the same throughout the term of the loan, while a variable rate can fluctuate as the market changes.

If you receive a competitive loan interest rate and wish to lock that rate in for the entire term of the loan, a fixed interest rate will be a better option for you. A variable-rate loan may provide you with a lower starting interest rate in some cases, but you could end up spending more on the loan over time.  

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Advantages of Low-Interest Loans

When you borrow money from a bank, credit union or another type of financial institution, you need to repay the full amount of the loan with interest. Low interest loans save you money, as a lower interest rate means you will pay less in financing fees and can put more money toward your principal balance. With a lower interest rate, you can typically repay your loan in less time. As such, a lower interest rate can help to reduce the amount of debt you owe.

When shopping around for these loans, remember all the benefits before settling on any provider you find. If you are eligible for low interest loans, consider using the money you save to pay for other debts or expenses. The lower lending terms allow you to stay on top of your debt easier, instead of defaulting on your loans.

How to Qualify for Low Loan Interest Rates

To qualify for low interest home loans, auto loans or personal loans, you typically need to meet credit requirements. While specific requirements vary by loan type and lender, you typically need:

  • A high credit score. To get lower interest rates when borrowing money, you need a FICO credit score of at least 740. To get the best interest rates, however, you need a FICO credit score of at least 800.
  • A good debt-to-income ratio (DTI). Your DTI pertains to the total amount of your gross monthly income that you use to repay your debts. With a high DTI, you may not be able to afford another monthly payment.  
  • A lengthier credit history. To get a competitive loan interest rate, your payment history must prove your creditworthiness. Additionally, a lengthier history of demonstrating good credit will get you the best rates.  

While low interest loans for bad credit are difficult to find, several affordable financing options are available to you if you need to borrow money for a car, home or another major expense. For instance, a Marcus loan from Goldman Sachs may be a decent option for you if you wish to apply for a personal loan but your poor credit score disqualifies you from obtaining a lower interest rate.

If you do not qualify for a low interest loan and you wish to borrow money for a short period of time, the app-based lender known as Earnin can provide you with a cheaper alternative to borrowing money from a traditional payday lender. Other affordable options to take advantage of if you have poor credit may include an Avant installment loan or a Prosper personal loan.  

Types of Loans Where it Pays off to Have Low Interest Rates

Getting a low interest rate is especially important in certain situations, especially if you wish to borrow a large sum of money for buying a house, car or another major purchase that will take more time to repay. The longer you take to repay the loan, the more you will pay in interest.

If you wish to apply for a personal loan, for example, a low interest rate can help you to save hundreds or thousands of dollars throughout the term of the loan, depending on the amount of money you borrow from the lender. When you finance a home, getting a lower interest rate means you will be putting more money toward your principal balance each month, helping you to pay off your mortgage more quickly.

How to Reduce Your Offered Interest Rate 

There are several ways that you can potentially reduce the interest rate you are offered when applying for a loan. These methods include: 

  • Holding off on applying for a loan until you have had the opportunity to raise your credit score further. 
  • Getting a co-signer that has a higher credit score, income or debt-to-income ratio. 
  • Getting a secured loan opposed to an unsecured loan. 

If you do not need a loan right away, the best way to reduce the interest rates that you will be offered is by improving your credit score. However, credit score repair or improvements do not happen overnight. Depending on your current score and any derogatory marks on your credit history, it could take months or years to effectively build your score. 

Obtaining a co-signer is a fantastic way to reduce an offered interest rate if that co-signer has a higher credit score, income or a better debt-to-income ratio. However, your co-signer will hold just as much as responsibility for the loan as you do and could end up on the hook should you default.  

Finally, a secured loan is often associated with lower interest rates compared to unsecured loans. A secured loan requires you to put up some form of collateral for the loan, such as your home, car or savings account. While these loans offer a lot of benefits, including a lower interest rate, they come with a more substantial risk as defaulting on the loan could mean the seizure of your collateral. 

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