Lenders make money on loans by charging customers interest and fees. Interest is calculated as a percentage of the amount borrowed. The cheapest loans are often reserved for those with high credit scores and you need to ensure you can keep up the repayments before applying. There are many ways to calculate interest payments. Companies vary based on the amount of interest and fees they charge.
The interest rates on personal loans depend partly on the loan amount and term. But lenders also assess your credit worthiness, usually by looking at your credit file. The lowest rates are reserved for the best customers – that is, borrowers with a spotless credit record.
If you are judged likely to default on the loan because of a poor credit history, you will be charged a higher rate of interest or your application will be turned down.
In other words, there is no guarantee that you will qualify for the advertised rates. Lenders are allowed to boast of low representative rates if those rates are charged to 51% of successful applicants, which means almost half could be charged a higher rate.
- High interest loans: Some personal loan companies charge high-interest rates, which encourage customers to repay loans quickly. Certain ‘pay day’ loans offer money with very high interest rates to tide you over until your next paycheck.
- Low interest loans: Many personal loan companies offer customers low-interest rate loans, which are often used to refinance debt with higher-interest rates. For example, if you have 3 credit cards which charge an average of 20% interest, you may want to pay off the balance due on those cards with a personal loan that has a lower interest rate of 12%. In general, to qualify for a lower interest rate, the borrower needs a credit score above a specific level.
- Varied interest rates: Many personal loan companies charge a wide variety of interest rates, which differ based on who is borrowing the money and how long it will take them to repay the loan. In general, borrowers with higher credit scores are charged lower interest rates. Additionally, smaller loans usually have higher interest charges.