The lowest rates for short term loans are usually available for those who have the most stable income, best affordability and strongest credit scores.
Across the entire personal loans market, the lowest rate available is around 3.3% APR, based on a loan lasting a minimum of 12 months. The most expensive rates are around 1,500% APR which are likely to be payday loans
lasting around 2 to 3 months.
As consumers, we will typically want to get the lowest rate possible, but it is important to know that every lender is different and has their own set of criteria - so the rates you get offered may vary on their own personal scorecards and other factors.
Nevertheless, if you are looking to secure the lowest rate, there are a number of things that lenders look out for:
- Stable income and affordability
- Strong credit score
- Low debt-to-loan ratio
- Other factors - age, gender, timing
- Type of product
- Repay early
Stable income and affordability
Having a stable income is often essential to secure a low cost loan and today, lenders will typically request proof of income via a recent payslip or bank statement. Some lenders ask for a minimum of 3 months proof. to show that you have some stability.
Also, being employed by a large firm for several months or years will potentially look better than someone who has just started a job or who is self-employed (and income may vary).
Affordability is also key. This refers to how well you can afford the loan and monthly repayments. You can have a stable income but if you have lots of outgoings such as rent, car bills, other debits and credits, the lender may deem you a little riskier and you will be charged a higher rate.
Strong credit score
A good credit score is often essential to get a low rate for a short term loan. Everyone receives a credit score when they turn 18 and this gives an indication of your creditworthiness, whilst confirming your name, age and address.
At 18, you always start with no credit, but you build this up over time by making payments for other things such as credit cards, phone bills and car finance.
To maintain a strong credit score, you need to make sure that all your monthly bills are paid off on time and that you do not have any credit card debts outstanding or delayed. Running a credit check is often automated by the lender when you apply, so having a higher credit score will put you in the category where you can receive a lower rate of interest.
Low debt-to-loan ratio
When you apply for a short term loan
, the provider will look at your monthly outgoings such as mortgage payments, rent, car bills, other credit card debts and outstanding loans. This gives the lender an indication of your debt-to-loan ratio.
So although you might have a very good income and strong credit score, the lender will look carefully at how many financial obligations you have each month. For more information, see what information do I need to provide for a short term loan
If you have little debt and can afford to repay on time, it will maximise your chances of approval and help you get the lowest rate possible.
If you have lots of debts to manage, the lender might consider you a little riskier, so this could result in being offered a higher rate or being declined.
Several other factors are taken into consideration when you apply for a loan. After all, every lender has their own criteria and some companies will only offer the lowest rates possible for a certain demographic that they know and trust will pay on time. Although this may vary, a lender might only offer the lowest rates to people who are homeowners, over 40 or female - because this has a high percentage of repayment based on their data.
Sometimes the rates offered can depend on the lender’s financial situation and what terms they are willing to lend on. If you apply in a quiet August period, you might be offered a low rate, but apply in a busy December and the rates might be higher.
If you are a repeat customer and have borrowed with the lender multiple times before, this could result in being offered a low rate, because you have built up trust. Or it could end up in getting a higher rate if your credit score and level of debt are getting worse.
It is common to find that lenders will offer two different rates for two different people of a similar age and credit rating. Every lender is different.
Depends on the product
There are some loan products that offer lower rates because of the nature of the product. A ‘secured loan’ that requires security or some form of collateral (such as a car or property) will offer lower rates because it is borrowed against something valuable - and the lender can always repossess the item or property if the customer does not repay. For this reason, you often find that mortgage rates start at around 2%-3%, secured loans start at 6% and guarantor loans start at 49% APR.
However, for an unsecured loan, the rates are typically much higher because the lender has nothing physical they can hold onto and they are basing their loan decisions on the customer’s income and credit rating, which may be subject to change. Hence, unsecured loans can sometimes be anywhere from 3% to 1,500% APR.
Repay early to save money
Even if you have been offered a higher rate than expected, there are some ways to lower the overall rate and one of the best ways is to repay your loan early.
If you repay your loan earlier than the full term, you will save on the daily interest accrued. So if you have applied for a 12 month loan, but only need it for 6 months, you can repay in full and save a lot of money on the interest.
Fund Ourselves proudly charges zero fees for repaying your loan early. As a responsible lender, we are passionate about helping our customers use our short term loans to improve their financial position. We offer some of the most competitive rates on the market for a payday loans alternative
and we do not charge any set up, application or upfront fees.