Coronavirus has frozen the income sources of many. With almost no income, people are finding it hard to pay for necessities. Though stimulus checks offered some relief, many are still struggling to fulfill their basic needs. To fill the revenue gap during the coronavirus pandemic, many are turning to personal loans. If you are also thinking of getting a personal loan during the coronavirus pandemic, then it is important that you get a low-interest rate loan.
Personal loan during coronavirus: how to get a low-interest rate?
Getting a low-interest rate is very important, especially in the current scenario, when there is a lot of uncertainty. A low-interest rate will help to keep your liability down. One of the best ways to get a low-interest rate is to shop around for lenders. This way you can choose the best rates and terms. Rates and terms can vary widely from one lender to another even for borrowers with a good credit score.
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However, shopping for a loan is not the only way that could help you qualify for a low-interest rate. There are several other factors that could help you get a low-interest rate. These factors are basically the parameters that lenders consider or evaluate before deciding whether or not to extend a loan, and if so, at what terms.
Let’s take a look at these factors that could help you qualify for a low-interest rate on a personal loan during the coronavirus pandemic:
The first and most important factor is your credit score. As you will be aware, the higher the score, the better it is. Lenders mostly rely on FICO credit scores, and a score of 700 or above could help a borrower qualify for a low-interest rate.
Before going for a personal loan, it is recommended that you check your credit score. You can easily check your credit score via any of three major credit bureaus – Experian, TransUnion and Equifax.
Debt-to-income ratio, co-signer and duration
The next factor that lenders consider is how much debt you currently owe in proportion to your monthly income. Lenders consider all your debts, including loans, credit cards and other debts. Basically, they check your debt-to-income ratio. If you have a favorable ratio, then you will likely be able to get a low-interest rate.
A low ratio suggests that you have taken on debt responsibly, and thus, it increases the chance of you getting another loan. Several online calculators are available that could help you calculate your debt-to-income ratio. You can calculate it yourself as well. Just divide your total monthly debts by your monthly income, and multiple it by 100.
A co-signer with a strong financial standing could also help you secure a low-interest rate. Some lenders have a requirement for a co-signer when giving a loan. A co-signer is personally responsible for the loan, meaning if you fail to pay the loan, then the co-signer has to make the payment on your behalf. Your loan will show up on your co-signer's credit report as well.
The duration of the loan you are considering taking on also affects the interest rate you qualify for. Generally, short-term loans carry a higher interest rate than a loan for a longer duration although sometimes a long-term rate can be higher. The primary reason behind this is that in a long-term loan, lenders' risk exposure is for more time. More risk means a higher interest rate. If you feel you will be able to repay the loan quickly, then you should go for a short-term loan. Also to consider, the longer the loan, the more you will pay out in total interest over the life of the loan.
Automatic payments, stable income, and collateral
Some lenders also offer a discount on the interest rate if you sign up for automatic payments. The discount is usually small, but over the years, it could result in big savings. Before opting for automatic payments, you should know that the lender may charge you a penalty if your account doesn’t have enough funds for automatic payments.
Your income source, or the work you do also has a direct bearing on the interest rate you qualify for. Lenders basically want to see how stable and consistent your income is. A regular, stable and consistent income makes it is easier to pay back the debt. On the other hand, if you are unemployed or have an inconsistent income, then it may be difficult for you to qualify for a low-interest rate (or even for a loan).
Most personal loans are unsecured, meaning they don’t require any collateral. However, many lenders do allow you to secure your loan with collateral, such as a vehicle. A secured loan is less risky as the lender has the option to seize the collateral if you fail to pay the debt. Thus, lenders offer a lower interest rate on secured loans. However, if you are unsure about your ability to repay, then taking a secured loan is not recommended.
Sometimes the type of relationship you have with the lender makes a big difference in securing a low-interest personal loan. For instance, if the borrower already has a banking relationship with the bank, such as a linked checking account, then it is possible that the bank offers a low-interest rate or compromises on a few parameters. Thus, it is very important that when you shop for a loan, you approach your bank as well.