Low Rate Personal Loans

A low interest rate personal loan comes with a lower rate of interest than many other loans on the market. The purpose of such loans remains the same however: they can be used to help pay for major expenses such as buying a car, renovating your home or consolidating debt.

Let’s look into these personal loans a bit more. 

Why does a low interest rate matter?

A low rate personal loan generally refers to a personal loan with an interest rate below the average. The current average interest rate for an unsecured personal loan (as of September 18, 2024) is 10.43% p.a., whereas the best rate sits at 5.49% p.a., as per the Mozo database. As for secured loans, the current average rate is 9.07% p.a. The best secured rate in the Mozo database also sits at 5.49% p.a.*

So, there’s quite a gap between the average and best rates in our data. Unfortunately, not all lenders offer these competitive rates, so it’s important to shop around and compare.

How to compare interest rates on personal loans

When researching personal loans, you’ll need to decide whether you want a fixed or variable interest rate, and your decision will impact the overall cost.

Let’s explore the differences.  

Fixed rate personal loans:

With a fixed rate loan you lock in an interest rate, which means your repayments stay the same for the life of the loan. While this can make it easier to budget for, these loans generally come with higher rates.

Variable rate personal loans:

With variable rate loans your interest rate could change at any time as they fluctuate with the market. The flip side is that variable rates are typically lower than fixed rates.

Ultimately, the type of rate you choose will depend on your current financial situation. 

If you’ve got room in your budget to cover any potential rate rises, you might opt for a variable rate. Just keep in mind that variable rates might not always be more favourable. 

What other things impact the cost of low interest loans?

Having a low interest rate is great, but it doesn’t necessarily mean it will be the cheapest loan option available. For example, your relatively low rate may be offset by high fees. Loans with extra features such as a redraw facility might also come at an added cost.

So there are a few variables to be aware of when comparing low rate personal loans such as:

• Flexible repayment options 
• A redraw facility
• Additional fees.

With this in mind, let’s use the Mozo calculator to see potential cost differences between two loans.

Example: 

Loan 1

Loan amount: $10,000

Interest rate: 10.35% p.a.

Loan term: 3 years

Monthly repayments: $324

Total interest and fees: $1,675

Loan 2

Loan amount: $10,000

Interest rate: 9.75% p.a.

Loan term: 3 years

Monthly repayment: $321

Upfront fee: $300

Total interest and fees: $1,874

As you can see, despite the second option having a lower ongoing interest rate than the first option, it’ll cost $201 more in the long run due to the $300 upfront fee. 

This is a good example of why it’s always important to crunch the numbers and compare.

How do I qualify for a low rate personal loan?

To determine whether you’re eligible for a low rate personal loan, lenders will typically assess your credit score, income stability, whether you have any existing debt and your overall financial situation. 

The better your credit report and current financial situation are, the greater your chance of getting a lower interest rate will be.

Let’s look at these factors that will determine the interest rate.

Existing debts:

If you have existing debt, a lender might see you as more of a risk and be less likely to approve your loan. Even if they do approve you, you could wind up with a higher interest rate.

Credit score:

Typically the better your credit score is, the better your interest rate could be. By the same token, the worse your credit score is, the higher the interest rate could be. So, if your credit has taken a hit, be sure to repair your credit score before applying.

Proof of income:

When applying for a loan you generally need to provide proof of consistent income. As you’d expect, the higher your income and the more consistent it is, the more likely you’ll be offered a lower interest rate.

The last word: Pros and cons of low rate personal loans

While low rate personal loans can draw people in with lower interest rates, they can also come with higher fees and more restrictions than other loans. It's always best to compare your options first. 

Here are a few benefits of a low-rate personal loan:

• Can use the loan to consolidate existing debt
• Provide a flexible way to pay for something large
• Competitive interest rates can be lower than credit cards.

Meanwhile, here are some of risks to look out for:

• High fee charges
• Strict repayment terms 
• Negative impact on credit score if you manage your loan poorly.

*These figures are based on a loan for $10,000, variable or fixed. These calculations are done based on a customer with good credit who meets all loan criteria.