When shopping around for finance, whether it is for personal reasons or your business, one of the first tasks is trying to secure the best rate. Here we share our top tips on how to find the best rate on your loan.
What does it mean to get the best rate on a financial product?
When speaking about the best loan rate, most people understand this as the lowest APR. The APR (annual percentage rate) allows borrowers to compare rates for all financial products including credit cards, personal loans and mortgages – providing a yardstick for making strong comparisons for borrowing over the course of one year.
At the lower end for a credit card, mortgage or personal loan, it may be 2% or 3% APR and this is often associated with low risk or good credit customers. At the higher end, paying rates of 30%, 50% or 100% is deemed very expensive and is often associated with higher risk borrowers, very tight repayment deadlines or customers with bad credit.
Our top tips include:
- Know exactly what you want from your loan
Knowing the purpose of your loan is essential for knowing how much money you want to borrow and for how long you are wanting to borrow. Once you have the value and the period of time, you can compare different lenders to see how much they will charge you to borrow that amount with that loan term.
If you are uncertain about how much you want to borrow, you can still compare, although it may not be as accurate. To do this, you can use comparison sites and experiment with different values and loan term periods in order to calculate hypothetical monthly payments.
- Improve your credit score
Before applying for a loan, you should be aware of your current credit situation. You can request your credit score and see how highly you score. Generally speaking, the higher your credit score, the better your chances of achieving more favourable rates on your loan. If you are concerned that your credit score is too low, there are different ways of improving your credit score such as removing errors from your credit report and paying off outstanding debt. Doing this before applying for a loan may improve your chances in the long run.
- Do your homework
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Before accepting any loan, you should always make sure to research the market to compare the different loan types and the different rates on offer. Every bank will make a decision on a case-by-case basis so it is worth seeing how much the interest rate varies between lenders. For this reason, it is sometimes better to work with a loan comparison site such as Proper Finance. They cut out the need to compare multiple offers and match you directly with a lender who can meet your loan needs.
In addition to interest rates, there are other factors to consider such as any fees you may incur such as operational fees or fees for early repayment. Each loan will come with its own range of terms and conditions which are worth exploring fully before entering an agreement.
- Only apply for one loan at a time
Every time you put in a loan application, the lender will carry out a credit check which, subsequently, will affect your credit report. If you put in an application every now and then, it should not cause any long-term damage; however, multiple loan applications in a short amount of time can be damaging and can cause lenders to view you less favourably. As a consequence, you can be offered worse rates for your loan.
If you want to work around this, you can carry out “soft” searches which help you use your personal details to assess different loan products and their suitability. The difference with soft searches, is that they cannot be viewed by lenders and will not affect your credit score. This means you can evaluate which loan options you are likely to be approved for before actually submitting the application. Working with a loan comparison site can help you avoid any surprises and they will only let you apply for loans they know you will be approved for.
- Weigh up your options
Before deciding to take out a loan and determining the best rates, you should first ask yourself whether a loan is definitely the cheapest option for you. If you are only looking to borrow a small amount of money, it may be worth looking at credit cards rather than a loan as this may automatically lead to lower rates and may also offer more flexibility in terms of repayment.
If you do decide to take out a loan, it may be that the more you borrow, the cheaper it will work out on a long-term basis. This is because, the larger the value borrowed, the less APR you are charged. You can do some calculations based on which loan you are considering and look at the minimum amount you would need to borrow to enter the next APR bracket – that way you are maximising how much you are borrowing, and minimising your interest rates.
The best thing you can do before taking out a loan is making sure that you understand all the terms and conditions and are fully comfortable with the agreement. Loans are generally a long-term commitment so you need to ensure that you can afford to meet the repayment plan on time. You should also check for any factors such as fees if you choose to make an early repayment as this may affect your long-term budgeting.
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