What a cheap personal loan really looks like
For most borrowers, the interest rate is the most important part of a personal loan. A high interest rate makes the loan expensive. A lower rate makes it cheaper.
But if you just look at the rate you could end up getting ripped off. Some personal loans come with hefty fees that end up costing you more compared to a low-fee loan with a higher rate.
Other factors like the length of the loan, the loan type and the ability to make extra repayments also change how cheap or expensive your personal loan ends up being.
How to make sure you loan is cheap in 2 quick steps
- Compare a wide range of personal loans from different lenders first.
- Use a repayment calculator and add together the cost of fees.
Looking for a personal loan that combines a low rate with minimal fees? Check out Finder's top personal loan picks for December 2023.
How a lower interest rate makes your loan cheaper
Your personal loan's interest rate determines how much interest is charged on your repayments. Here are 3 otherwise identical loans with different interest rates.
|Loan 1||Loan 2||Loan 3|
|Loan term||3 years||3 years||3 years|
|Interest rate (p.a.)||9.00%||19.00%||25.00%|
|Total loan cost||$11,448||$12,304||$13,197|
In these examples the lowest rate loan works out to be $1,607 cheaper than the highest rate one.
How do I get a lower interest rate?
If you have an average credit score you won't be able to get a 9.00% rate no matter how hard you look.
But every borrower can still find a lower rate, whether their credit is excellent or not. The main thing is to compare rates from many lenders and make sure you're getting a good deal.
How fees can make your cheap personal loan expensive
Some lenders charge a monthly fee just for keeping the loan account open. And there's often an application or upfront fee that can cost hundreds of dollars.
Some lenders charge a percentage of your loan amount as a fee.
Here's an example:
- Your lender charges an application fee that's 1.5% of your loan amount.
- You borrow $10,000.
- Your application fee is $150.
When personal loan fees make your cheap loan more expensive
Here are 2 personal loans with the same loan term and loan amount. Loan 1 has a lower rate but a $20 monthly fee. Loan 2 has a slightly higher rate but no monthly fee.
Which is cheaper?
|Loan 1||Loan 2|
|Loan term||5 years||5 years|
|Total loan cost||$23,087||$22,368|
The higher rate loan ends up being $719 cheaper over 5 years. All because of that little monthly fee.
- Note: Comparison rates
Loans have a comparison rate listed alongside the interest rate. This figure is designed to show you the actual cost of a loan taking into account the interest rate and the loan fees.
How the length of your loan affects the true cost
Most personal loans have terms between 1 and 7 years. And the length of the loan really affects how cheap the loan is in 2 ways:
- A shorter loan term = less interest charged, but higher monthly repayments.
- A longer loan term = more interest charged over time, but cheaper monthly repayments.
A shorter loan term is technically a cheaper loan overall because you pay much less interest. But for many borrowers the cheaper loan is the one where the monthly repayments aren't crushingly high.
Every borrower has to find the right balance between the monthly repayment size and the overall life of the loan.
Here are 3 examples, using identical rates and loan amounts but different terms:
|Loan 1||Loan 2||Loan 3|
|Loan term||3 years||5 years||7 years|
|Total loan cost||$10,126||$11,673||$13,348|
Loan 3 has by far the cheapest monthly repayments. But by taking 7 years to repay the loan you pay more than $5,000 in interest. Whereas loan 1's 3-year term means you pay just over $2,000 in interest.
4 tips to find the cheapest personal loan
- Improve your credit score. A better credit score means you can get a lower interest rate from many lenders who use risk-based pricing. Check out all the ways you can improve your credit score.
- Compare widely. Check out personal loans from big banks, small banks and online lenders to make sure you're getting a loan that's genuinely cheaper than the average.
- Use a guarantor. If you have bad credit or are struggling to get a loan approved, having someone support your application can help you get approved and get a cheaper loan. The catch? If you can't repay the loan your guarantor is on the hook for it.
- Find the right type of personal loan. There are different personal loan types that suit different borrowers, and some are cheaper than others. A secured loan will have a lower rate than an unsecured loan from the same lender, for example. A car loan with balloon payments might look very cheap at first but the final payment could make it very expensive.
Understanding different personal loan types
- Secured car loans. Secured car loans are some of the cheapest personal loans but you'll need to be buying a new (or reasonably new) car and have good credit. Rates may go as low as 5% p.a. or as high as 29.99% p.a.
- Secured personal loans. Rates for secured loans can range from 5% p.a. to 29.99% p.a. Like secured car loans, the rate may differ based on your risk profile.
- Unsecured personal loans. Rates for unsecured personal loans can range from 8% p.a. to 29.99% p.a. depending on the lender.
How to make your repayments cheaper
Once you've found a suitable personal loan you do have a few ways to make the repayments cheaper regardless of how high or low the interest rate is.
Adjust the loan term
The length of the loan affects how cheap it is month-to-month and overall in terms of the interest costs. Play around with the loan term until you find the right balance.
Make extra repayments
Most personal loans let you make extra repayments. Putting aside even just a little extra each month to pay the loan down reduces the interest you get charged.
Just check that your lender doesn't charge a fee for making extra repayments.
It sounds obvious but a smaller loan size works out cheaper than a larger one. If you're able to reduce your borrowing amount you can end up saving yourself from money.
Why compare personal loans with Finder?
Our personal loan comparison is completely free to use. There are no costs at all for you to use our database to find a better deal. Better still, we regularly run exclusive deals that you won't find on any other site.
We've researched and reviewed hundreds of loans as part of our Finder Awards. Our database and tables are always up-to-date and our in-house experts regularly appear on Sunrise, 7News and SBS News.
We are independently owned and have a mission to help Australians make better financial decisions. That means our opinions are our own and you can compare nearly every personal loan in Australia (and find a better deal).
Since 2014, we've helped 300,000+ people find a personal loan by explaining your options simply. You don't need to give us any details to use our comparison. We're here to help you make a decision.
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