Low-interest loans explained

If you need to take out a loan, one of the biggest factors to consider is the interest rate. That rate will determine the size of your monthly repayments and what the loan costs you overall.

So, what do you need to do to find a loan with a low interest rate? And where can you find them? Let's get started.

What types of loans offer the lowest interest rates?

The first thing to bear in mind is that interest rates charged typically vary depending on the sort of loan you’re looking for and your personal credit rating. And, broadly speaking, the longer the term of the loan, the lower the interest rate.

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So, if you are borrowing money for just a couple of weeks with a payday loan, for example, you’ll likely pay a much higher rate than you would if you were borrowing money over years with a personal loan, or over decades with a mortgage, which tend to carry the lowest rates of all loans.

However, even within the different types of loans there will be significant variances in the interest rates charged by different lenders.

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Finding a low-interest loan

If you are looking for a loan, it’s important to do your research and see how different products from different lenders compare. Just applying for a loan from a bank because you already have a current account with them is not a great idea.

If you’re looking for a personal loan, our price comparison site is a good place to start.

» MORE: Short-term loans vs long-term loans

Alongside results for conventional lenders, comparison sites are increasingly including peer-to-peer platforms. Peer-to-peer sites unite investors with money to lend with borrowers in need of cash, and structure loans on their behalf.

The application and approval process will be as thorough as it is with loans through traditional banks or building societies, but you may find it is a cheaper way to borrow.

If you’re looking for a mortgage, you may also want to speak to a mortgage broker. These advisers can help you work out what sort of product best meets your needs, and they will have access to lenders and mortgages that you cannot access directly.

How can I get a low-interest loan?

When it comes to personal loans and mortgages, the lowest rates are reserved for borrowers with the best credit scores. The less risk you present to a lender, the better the rate of interest they will be willing to offer.

As a result, it's always worth ensuring your credit score is in the best shape possible before you start applying.

When taking out a mortgage, the size of your deposit also plays a big role in determining the interest rate you pay. If you are borrowing at 60% loan-to-value (meaning you put down a deposit of 40%), you will likely get the best rates. Conversely, if you have a deposit of, say, 5% or 10%, the interest rates available will be higher.

» MORE: Calculate how much you could borrow

Getting a lower interest rate on my loan

It’s not really possible to lower the interest rate on a loan which you have already taken out. But if you make your repayments on time and your credit score improves, it may mean that the next time you need to borrow, whether that’s with a personal loan or a mortgage, you will qualify for a low-interest loan.

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