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
Looking for a personal loan that combines a low rate with minimal fees? Check out Finder's top personal loan picks for December 2023.
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 amount | $10,000 | $10,000 | $10,000 |
| Loan term | 3 years | 3 years | 3 years |
| Interest rate (p.a.) | 9.00% | 19.00% | 25.00% |
| Monthly repayments | $318 | $342 | $367 |
| 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.
The lowest personal loan rates go to borrowers who have excellent credit scores. You'll also need to have a steady income and meet all the borrowing requirements.
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.
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:
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 amount | $15,000 | $15,000 |
| Loan term | 5 years | 5 years |
| Interest rate | 16.00% | 17.00% |
| Monthly fee | $20 | $0 |
| Monthly repayments | $385 | $373 |
| 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.
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.
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 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 amount | $8,000 | $8,000 | $8,000 |
| Loan term | 3 years | 5 years | 7 years |
| Interest rate | 16.00% | 16.00% | 16.00% |
| Monthly repayments | $282 | $195 | $159 |
| 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.
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.
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.
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.
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Hey I have a existing personal loan with Commonwealth back was 4000 an I consolidated to 10000 can I consolidate it again and what would be best loan for me to do that with low interest rates fixed price unsecured?..
Hi Matthew,
Thanks for getting in touch with Finder. I hope all is well with you. :)
If you want to consolidate your personal loan, you may do so with other lenders. Here’s a list of debt consolidation loans in Australia.
On that page, you will see a table that allows you to conveniently compare your options based on their interest rates. Once you find the right one for you, click on the “Go to site” green button to learn more or initiate your application.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua