What's a good interest rate for a loan?

APR stands for annual percentage rate. When you take out a loan, you’ll need to pay it back ‘with interest’. Interest is how lenders make a profit and this is where APR comes in – it’s made up of the interest rate and other charges you might have to pay (like an origination fee).

Origination fee = a charge from the lender for processing the loan.

When you’re looking for a loan, you’ll often see it advertised with a fixed interest rate and a representative APR. It’s the typical – or representative – rate for the majority of borrowers.

Lenders only have to give that rate (or a lower one) to 51% of people who are accepted for the loan – and they don’t have to give the same rate to that group of people.

Representative example

If you borrow £10,000 over 60 months at a fixed rate of 9.48%*:

Monthly repayments = £234.99

Total amount repayable = £14,099.54

*15.4% representative APR

In this example, the APR is higher than the interest rate because it takes into the other fees mentioned before. If there aren’t fees, the interest rate and APR will be the same.

There’s not a specific ‘good’ interest rate but the lower the rate, the less overall interest you’ll pay. You can get access to lower rates – and better offers generally – by improving your credit score.

Your credit score acts as an indicator to lenders and tells them how well you manage money. A high score suggests you’ve managed previous credit accounts well (like paying back what you owe, on time and in full) – so, they should consider you a less risky option.

Of course, lenders take into account other information about you, too – like your income, the size of the loan and your general credit history.

That’s because lenders want to be sure you can make the monthly repayments. They’ll use all this information when deciding what to offer you.

The rates you see when looking for any loan are directly impacted by your credit score – because the things that shape your score tell lenders if you’re a reliable, low-risk borrower.

As well as the information in your report – like payment history, credit mix and credit utilisation – lenders might also look at the following to determine if you can afford the repayments.

Your income

Having a consistent and steady income can help boost your appeal as a borrower because it suggests you’re capable of paying regular expenses.

Your debt profile

Calculating how much of your income is going towards existing debt payments (known as your debt-to-income ratio) is a good indication of whether you can afford to repay another loan.

The size of the loan

If you want to take out a large loan, the overall interest will be higher (because it’s a percentage of the loan amount). And, more generally, the total amount (loan plus interest) is something lenders will want to be sure you can pay back.

The repayment term

A shorter term (number of months) will mean higher monthly payments but lower overall interest. Simply, lenders could consider if the higher payment (caused by a shorter repayment term) is something you can repay.

The interest rate you see isn’t something you can control but you can take steps to put yourself in the best position possible, for you.

• Compare your options before applying – so you can see what different offers are out there.
• Check for ERCs – if there aren’t any early repayment charges (ERCs), you could see if paying back your loan early will reduce the amount of interest you’d pay overall.
• Choose a shorter loan term – you could see how much you’d save if you chose to pay higher monthly amounts.

Comparing loans is a great way to see what’s available to you. Before you start your search, you should have an idea of how much you want to borrow and how many months you want to pay it back over.

Searching for loans will leave a soft search on your report – but it won’t affect your credit score. So, you can compare as many loans as you like before applying.

When you apply for a personal loan, a hard search will appear on your report and your credit score will be affected. But, the impact should be short-term if you responsibly make repayments.

It’s a good idea to wait about six months between taking out lines of credit – otherwise, it can look like you’re desperate for credit and lenders might be reluctant to offer you low interest rates or high amounts.

What else do you need to consider before getting a personal loan?

You should make sure it’s the right choice for you. A loan is a form of debt, so understanding the benefits and risks is a good way to be sure about your choices.