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How to get yourself the best rate on a loan

How do you get the best rate on a loan? What are the things to consider when you're shopping around? Here are 6 tips to help you get the best rates on a loan.

06 February 2017Hannah Patnick 5 min read
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Although there are lots of reasons a loan may or may not be right for you, the best loan rate is often the loan with the lowest APR. The lower the APR, the less you will pay.

In order for you to work out the best loan rate you can get, the first thing you should do is decide how much money you want to borrow and how long you’ll need to pay it back. This will allow you to compare like for like how much different lenders will charge you to borrow the same amount of money.

If you’re not sure how much you want to borrow, you could use a tool on a comparison site that will let you play around with different amounts of money and the time you need to repay the loan. A tool like this will make the calculations for you so you can see what the size of the monthly repayments would be. Generally speaking, the longer you borrow money for, the more a loan will cost you in interest overall.

The higher your credit score, the better the chance you have of being offered a cheaper rate of interest on a loan.

In order to get the best loan rate, you could try taking some steps to improve your credit score before you apply for a loan.

If you’re looking for a loan, avoid the temptation to apply for several loans at once.

Each time you apply to borrow money, a check is carried out on your credit report by a lender. These credit application searches (or 'hard' searches) leave a mark on your file. Whilst one application every so often won’t cause much damage to your credit rating, if you make a lot of applications in a short period of time it is likely to damage your credit score and you’re less likely to be offered the best loan rate. This is especially the case if the applications are unsuccessful as this can further negatively impact your credit score.

The way around this is to use quotation search (or 'soft' search) tools which use just the key information about you to tell you which products you’re most likely to be accepted for. Soft searches can’t be seen by lenders so you can do this as much as you want, and this way, you’ll only need to submit a full application on products that you’re likely to get.

ClearScore uses a soft search tool. Find out more about soft searches and hard searches.

Each bank/lender will make a different decision when giving you a loan so try not to get carried away and take out the first loan you see. Some will offer a much higher rate of interest than others, so it’s worth shopping around.

Also remember that loans aren’t just about interest rates. It’s great if you’re eligible for a loan with a low interest rate, but it may be worth studying the other features of the loan. For example, will the lender let you pay back the loan early if you want to or are there handling fees that you may have to pay? This may make certain loans more expensive than others so it’s a good way to compare similar-sounding loans.

It’s bad enough applying for a loan and not being accepted. But it’s even worse when you’re approved and then discover the interest rate is not only higher than you were shown, but the amount you can borrow is also lower.

With our Triple Lock guarantee, you won’t face any of those nasty surprises. You’ll always know exactly where you are and be in full control of your credit choices.

Whenever you see an offer that’s Triple Lock guaranteed, you can be sure the credit limit and interest rate shown aren’t going to change after you apply. You’ll even be pre-approved, so you know you’re definitely going to be accepted.

The maximum amount you’re normally able to borrow with a personal loan is around £25,000. The maximum you can usually borrow on a credit card is around £5,000. If you’re thinking of borrowing a smaller amount of money, it might be worth considering getting a credit card rather than a loan.

The advantage of a credit card is that it gives you a little more flexibility than a loan– you can borrow money as and when you want and you can pay it back as soon as you want. In contrast, a loan will give you a fixed sum of money, a set amount of interest to repay and most likely a repayment plan that you’re locked in to for a certain amount of time.

The other thing to bear in mind is that if you’re able to get a 0% interest offer on a new credit card this is an even cheaper way to borrow as it’s likely there’ll be little or no charge at all. Of course, this only works if you remember to make repayments on time and if you pay off the card before the 0% interest offer runs out.

Lenders tend to charge different rates of APR depending on how much money you borrow. Typically, the more money you borrow, the less APR you are charged. Often the amount of money you need to borrow to get a lower APR rate can be small – it’s a case of finding the amount that tips you into the next APR bracket. If you want to work out how to get the cheapest APR (and therefore cheapest overall cost of your loan) it’s probably worth doing some calculations to work out the best amount to borrow.

Here’s a representative example from a lender on our panel to show how the amount you borrow can affect the cost of your loan. (Remember since this is just an example you’ll need to do your own calculations once you know the terms of the loan you’re considering).

Loan option 1:

Borrow £7,450 for 36 months at a nominal fixed annual rate of 3.64% per annum, representative 3.7% APR.

Your monthly repayments would be £135.99 and your total amount repayable would be £8,159.40.

But if you borrow £50 more, the APR drops to 2.8%.

###Loan option 2:

Borrow £7,500 for 36 months at a nominal fixed annual rate of 2.76% per annum, representative 2.8% APR.

Your monthly repayments would be £133.98 and the total amount repayable would be £8,038.80.

So by borrowing £50 more, you’d make a saving of £120.60.

It’s a good idea to budget ahead of time so you can feel confident that you’ll be able to make the monthly repayments. When you compare loans, you’ll be able to see what the monthly repayments are and the total amount repayable. So, before you apply, have a think about what that extra monthly expense will mean for you.

Loans come with interest – it’s how lenders make a profit. The shorter the loan term, the higher the monthly repayments will be, but it means you’re paying less in interest. And that lessens the total amount you’ll need to repay.

And finally…make sure a loan is really what you want to do

When you take out a loan it’s a big (and sometimes long term) commitment. Once you’ve taken out the money you may be charged extra fees to pay it off early if you change your mind. So before you take out a loan, make sure you’re certain this is the best option and that you don’t rush into a decision.

Hannah Patnick Image

Written by Hannah Patnick

ClearScore Communications Lead

In her previous life Hannah was a consumer journalist making primetime television shows. Now she's ClearScore's Content Producer. Amongst her many talents, Hannah is famed for her excellent tea-making skills.