From optimising your credit score to comparing loans and negotiating with lenders, this is how the financially savvy among us get the lowest interest rates on loans.

Whether you have good or bad credit, you can use the information provided in this guide to secure a low interest rate on loans and save thousands in the long run.

What is considered a low interest rate?

Let us have a look at what is considered a low-interest rate. A low-interest rate is typically below 12%, but it also depends on your finances and the lender. If you have good credit, you are more likely to qualify for rates in the single digits.

If your credit and finances are not strong then it’s best to look at loans you can secure with collateral or borrow from credit unions which normally offer lower rates than other lenders.

Interest rates that fit into your lifestyle

It’s essential to know how interest rates will affect your current and future lifestyle. Remember that when you decide on an interest rate, it should be one that works best for you and takes into account where you are at now and where you want to be in the future. So have let’s have a look at the different types of interest rates that are out there.

How do lenders determine interest rates?

The interest rate that you receive from a lender is determined by your current financial situation and financial history. Lenders want to know if you will be able to pay back your loan or if you will struggle to keep up with your payments and the best way for them to do this is to consider your credit score.

The procedures for getting a low-interest rate

You can apply for a loan online, in person or even over the phone, once you find a personal loan you are eligible for. Lenders have pre-qualification options and that gives you an estimate of what type of interest rate you might be eligible for without a hard credit check.

After submitting your application, your file is then reviewed by an underwriter and pulls a hard credit check, which will cause a temporary dip in your credit score.

You may be asked for additional documentation like bank statements, pay stubs or tax forms. If your online personal loan is approved, the money is then electronically transferred into your bank account. You will then have to pay off your loan monthly.

Do interest rates differ with each loan?

The difference between the interest rates for different loans reflects the risk factor which is determined by a client’s profile.

Three different kinds of interest rates

Essentially, there are three types of interest rates. Namely the nominal interest rate, the effective rate and the real interest rate.

The interest of an investment or loan is simply the rate on which interest payments are calculated.

What’s a good interest rate?

According to the NAFCU, the bank interest rates for a 3-year unsecured loan will range from 2.9% to 18.86%, with an average of 9.74%, which means anything over 10% is likely to be considered high.

Types of loans in Australia

Common types of loans include unsecured, secured and fixed and variable rate. You must decide which is best for you depending on your circumstances. Many personal loans are unsecured with fixed interest rate sabd therefore fixed payments. There are other types of personal loans, including secured and variable-rate loans.

Australian rate influencers

The Reserve Bank of Australia meets every month, on the first Tuesday of every month and they come together to talk about the nominal state of the economy including things like consumer finance, inflation, economic growth and employment rates.

Based on these or more factors the official cash rate is either increased, decreased or left unchanged. High-interest rates will help reign in inflation by encouraging Australians to save their money instead. Low-interest rates will help boost the economy by encouraging Australians to spend, borrow and invest.

Types of interest rates

Fixed interest rate: the interest on your loan and savings are locked in at a certain value, it isn’t affected by rises and falls in the market. It can be both a blessing and a curse, but if you like a sense of certainty, then fixed interest rate is for you.

Variable interest rates: they are more flexible and move with the market. It’s also based on the RBA’S official cash rate. If your loans or savings work on a variable interest rate, the amount of interest you pay or earn can change from day to day.

Comparing interest rates

It’s important to always compare interest rates before you decide on any single option, because not only do you need to consider the best interest rate available but also the extra fees that you might get with it.

What are lenders looking for?

Here is some extra information to help explain these factors, also commonly known as the 5 C’s. To help you better understand what lenders are looking for: Credit history, Capacity, Collateral (when applying for secured loans) Capital and finally, Conditions.

Let us have a closer look at the 5 C’s

  • Credit History: Your credit history plays a big role when applying for a loan and whether or not you qualify for different types of credit. They will have a look at payments that you made over time and how you managed your credit. Your credit report is a very detailed description of a list of your credit history, that was put together by the lenders that you received credit from. While the information may differ from one credit agency to another, the report will still include the same information, such as the names of lenders, types of credit, your payment history and more.
  • Capacity: Your income and employment history are good indicators of your ability to repay outstanding debt. Your income amount, stability and type of income may all be considered. Your debt to income ratio will be evaluated as well.
  • Collateral (when applying for secured loans): With a secured product, such as an auto or home equity loan, you will pledge something you own as collateral. The value of your collateral will be evaluated and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision.
  • Capital: Capital represents the savings, investments and other assets that you can use to help you repay the loan. Even though your household income is expected to be the primary source of repayment. All of this will be helpful if something happens to you like losing your job or experience other setbacks.
  • Conditions: Lenders may want to know the purpose of the loan, how it will be used and why. Other factors will be considered such as environmental and economic conditions.

The 5 C’s of credit is a well known and common banking conept. So now that you know them, you can be better prepared for the questions that you may be asked the next time you apply for credit. I hope that all this information concerning interest rates and credit was helpful to you and that it will help you secure a low interest rate on your next loan.