Many people qualify for a personal loan, but those that qualify for a low interest personal loan are harder to find. By nature, unsecured personal loans tend to come with a high interest rate because they represent a higher risk for the lender. Without any collateral to secure the loan, lenders have little recourse if the borrower defaults on the loan.
If a borrower defaults on a personal loan, lenders can either send them a collection agency or pursue expensive legal action; neither option works out well for the lender. However, even though their qualifying standards may be higher, lenders are willing to issue low interest personal loans to the right candidates.
The Right Type of Credit
One of the first things a lender will look at is the borrower’s credit, or FICO, score. In order to qualify for a low interest personal loan in most cases, you must have a FICO score of at least 740 on credit reports from Equifax, Experian and TransUnion.
Credit reporting agencies use five major criteria to determine your credit score, as follows: 35% payment history, 30% balances on credit lines, 15% the length of your credit history, 10% amount of new credit that you have and 10% is the type of credit you have such as revolving or installment credit lines. Obviously the higher your credit score is, the better the chances are that you will be approved for a personal loan with a low interest rate.
Additionally, if you have a history of repaying installment loans with no late payments that will definitely work in your favor. Even though that is part of what determines your FICO score, lenders will specifically look at how you have repaid previous loans and if you have had any installment loans before.
Choosing the Right Lender
Even though a good credit score is important with all lenders, they all have different standards for determining interest rates. Online companies like creditloan.com, prosper.com, and discover.com match borrower applications with multiple lenders.
Since all lenders have different lending criteria, some will offer better interest rates than others do. For example, a traditional brick-and-mortar bank may have a strict policy of only extending low interest personal loan offers to people with credit scores over 750. On the other hand, an online bank may give you a low interest personal loan even if your credit score is around 725.
If you are one of those people who is on the edge between having good credit and great credit, the lender you choose to go with can mean a big difference in the interest rate you receive on your personal loan. It also may be a good idea to check with a bank that you already do business with because most banks offer terms that are more favorable to existing customers.
Income and Employment
Even with a good credit score, the lender is going to what to make sure that you have a significant amount of income coming in so that you can pay your bills. Many lenders have specific income requirements for low interest personal loans.
Banks do not publicly disclose what their income requirements for single and/or married applicants are, but you can be certain that income is part of their underwriting guidelines. Obviously, applicants with good credit and a high income receive the best interest rates.
In addition to the fact that applicants obviously need to have a job, lenders often look at how long they have been with their current employer. Banks have a strong preference for applicants who have worked for the same employer for a good number of years because it shows stability.
People who change jobs every couple of years, or have recently changed jobs, are a lot less likely to qualify for a low interest personal loan even if there are no gaps in their employment history.
Another big qualifier for getting a low interest personal loan is having assets. Most lenders will not even consider offering a low interest personal to an applicant who is not a homeowner. Even though you may not be using any of your assets as collateral, the lender is looking for financial security and stability.
An applicant’s primary home, cars, watercrafts, secondary homes and even retirement funds like a 401k plan or Roth IRA are all important assets that the bank will consider while determining an applicant’s interest rate.
In most cases, the bank will require documentation of all an applicant’s assets including information about their checking and savings accounts if the borrower is not already one of their customers. If all of the assets are paid off, that looks even better because it is a good sign that the applicant is a responsible borrower with a solid history of repaying his or her debts.
Applicants do not have to be wealthy to get a low interest personal loan, but banks often do require that they have assets of some kind.
One Final Note
The final important thing to consider is that personal loans are usually for relatively small amounts of money. Candidates who are looking to borrow $5,000 or less are more likely to get a low interest rate personal loan than people who want to borrow money in double-digit amounts. In some cases, banks may offer a lower interest rate on smaller personal loans because they are taking less of a risk.
As you can see, banks take a lot of things into consideration when they are determining who is a good candidate for a low interest personal loan. In fact, some banks do not even offer low interest personal loan products at all because they would rather not go through the extensive screen process and because they do not make as much money as they do on loans with higher interest rates.
If you want to get a low interest personal loan, but do not feel like you are qualified yet, your best bet is to take a loan with whatever terms you qualify for, establish a solid payment history and then refinance the loan when your credit is better.