Low interest loans

Borrowing money usually comes at a cost. On top of repaying what you owe, you’ll usually pay interest – this is the lender’s charge for letting you use credit. If you can secure a lower rate, this will help you save money.

Here, we’ll look at how low interest loans work, and how you may be able to reduce the amount of interest you pay.

How does interest on a loan work?

When you get a loan, you’ll be offered an interest rate. This is calculated as a percentage of the amount you borrow, and it’s what the lender will charge you each month on top of your repayments. The rate you’re offered may depend on things like how much you borrow, how long you borrow it for, what kind of loan you choose, and your credit score.

Tiered interest rates – how much should I borrow?

A tiered interest rate system means the lender charges different rates based on how much you borrow. Usually, the more you borrow, the lower the interest rate – although payday loans are an exception to this. However, it’s important to borrow only as much as you can afford – even if borrowing a higher amount gets you a lower interest rate.

How long should I get a loan for?

Interest is charged monthly, so the longer you’re paying a loan off, the more interest you’ll pay overall. For example, if you borrow £10,000 at a fixed interest rate of 5% over five years, you’ll pay a total of £1,292.24 interest. If you got the same loan, but over ten years, you’d pay a total of £2,662.82 interest – more than double the previous amount.

However, repaying your loan over a shorter period usually means larger monthly repayments. So it’s important to balance your financial ability with how much interest you’re willing to pay overall.

How does my credit score affect my loan interest rate?

Each time you apply for a loan, the lender will assess your creditworthiness by considering information such as:

  • Information on your credit report, including your credit history and public data (e.g. CCJs)
  • Your application details, which may include your income and savings
  • Any data they already hold on you, e.g. if you’ve been a customer before

A good credit score can improve your chances of getting approved for a loan, and at lower rates. You can get an idea of how lenders may see you by checking your free Experian Credit Score.

But remember, lenders’ criteria can vary, so some may offer you better rates than others. That’s why it’s a good idea to compare loans before you apply. When you compare with Experian, you’ll see your eligibility rating for personal loan offers – helping you understand your chances of approval before you apply. And don’t worry, it won’t affect your score.

Just remember, we’re not a lender for cards and personal, car & guarantor loans, we’re a credit broker working with selected lenders and brokers. That means we don’t provide credit, but we can help you find a credit offer that fits.

5 tips for getting a low interest rate

Here are our top tips for getting offered lower interest rates:

  1. See if you can improve your score. You may want to sign up to a CreditExpert paid subscription to understand what’s affecting your score, and get personalised tips on how you may be able to improve it
  2. Try not to make multiple credit applications over a short period of time. Each application is recorded as a hard search on your credit report – whether you’re accepted or not. These can lower your score, meaning you’re less likely to get approved for a good interest rate
  3. Compare loans from across the UK market and keep an eye out for the latest offers
  4. Research the different types of loans to find one that’s most suitable for you. For example, if you have a low credit score, you may get a better interest rate with a secured loan rather than a personal loan, although you risk losing your home if you can’t keep up with repayments
  5. Don’t restrict your search to loans – consider other forms of credit, such as credit cards

Can you get interest free loans?

Interest free loans don't really exist. However, you could get an interest free loan period when borrowing with a credit card. Some banks may allow for interest free overdraft as well.

Generally speaking, personal loans are suitable for long-term bigger purchases, such as a car or home improvements, and the interest is included in the repayments.

If you need to borrow a relatively small amount, you could consider a 0% purchase credit card, and pay the debt off before the interest-free period ends. Other forms of interest-free credit can include extended overdrafts, or moving existing debt to a 0% balance transfer card.

We're a credit broker, not a lender

Compare loans with Experian