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Last updated: 16/10/2020 | Estimated Reading Time: 5 minutes

How to Get the Best Rates on a Loan

Finding the best possible rate on a loan can seem like a daunting challenge with no clear answer. However, there are a number of steps you can take to ensure that you get the cheapest and best possible loan for you. In this guide we take you through the basics of interest rates and give you some tips on keeping costs down.

In This Guide:

What are Loan Rates?

Loan rates are essentially how much you pay as interest on top of your loan when repaying the lender. Loan rates are measured by their APR (Annual Percentage Rate) – the annual rate of interest charged to borrowers. Generally speaking, the ‘best’ loan rate is the one with the lowest APR.

The interest rate will vary depending on a range of factors, such as:

  • How much money you want to borrow
  • How long you want to borrow the money for
  • Whether you have a good record of making payments on time

Mostly it comes down to how high-risk the loan is – the higher the risk of the lender not being repaid, the higher the interest rate they will charge. Your risk is higher if you want to borrow a lot of money, for a longer amount of time, and you have a bad history of making payments. You should also note that the real interest rate you will be charged is often different from that advertised, as lenders will recalculate the rate depending on your individual financial needs and history.

There are a few steps you can take to get the best rates on a loan:

Know Exactly what you want from your Loan

To get the best possible rate on your loan, the first step is to be entirely clear on why you are getting it. You should know precisely how much money you want to borrow and how long you need it for. This will help when it comes to comparing the rates charged by different lenders offering the same amount of money, as is discussed below.

How long you have to repay your loan is known as the loan ‘term’ – a longer term means that you pay more interest overall, but the interest rate is usually lower and so your monthly payments are smaller. Deciding the term comes down to your individual needs. You should also know that borrowing more can cost you less, as larger loans typically come with a lower APR. However, you shouldn’t borrow more than you can afford to pay back, even if that means you end up paying more in interest.

Check and Improve your Credit Score

Lenders will always offer better rates to borrowers with higher credit scores. This is because those borrowers have a better track record with making payments and repaying loans on time, meaning they are lower risk for the lenders. This means you can save yourself money by improving your credit score. For more information on how you can do this, see our article ‘How to Improve your Credit Score’. You can check your credit score for free online, using credit scoring agencies such as Experian or Equifax. You should make sure you use these tools before making applications for loans, as they count as ‘soft’ searches. These will not stay on your record and cannot be seen by lenders.

When you apply for loans, lenders carry out ‘hard’ checks which stay on your record and can adversely affect your credit score. The more applications you make, the less reliable you will look to other lenders and the less likely you are to be given a favourable interest rate, or any loan whatsoever. Try to limit applications to around 4 or 5 a year at the most, and only apply once you have done all the necessary research.  

Shop Around and Compare Available Loans

One of the best ways to find cheap loans and low interest rates is by shopping around and comparing loans available on the market. You can do this on our website. For the same amount of money loaned, every bank or lender on the high street or online will offer different terms, conditions, and interest rates. You should conduct a thorough search of the loans available and read all of the small print. Many loans that appear cheap on first sight have hidden costs and dangerous variable interest rates.

It’s also important not to be drawn in solely by the lowest interest rate. Some loans may charge comparatively little, but could have more strict payment deadlines, and don’t allow you to have the flexibility of paying off early. This means you could end up paying more on a loan you could afford to pay back much earlier.

Is a Loan Right for You?

The best loan for you may not be a loan at all – it’s always worth considering alternatives. If you need to borrow less than £5,000, the cheapest way is often through a credit card with interest-free purchases. These usually work out cheaper than loans and are more flexible in terms of the amount of money you borrow, how long you borrow for, and when you can repay the lender. However, just as for loans you must still remember to make payments on time and in full, or it could end up costing you significantly more, as well as damaging your credit score. To prevent this from occurring, you can set up a direct debit from your current account to make sure minimum repayments are made until the debt is cleared. You should also make sure that the term that you can purchase things interest-free is long enough for you to repay the full amount borrowed.