Have you thought about purchasing a new car, buying a home, or financing a wedding recently? Or perhaps you would like to have more cash on hand or have a way to fund your child’s education. Maybe you even have high credit card debt that you wish to pay off as soon as possible.

If you have been considering any of these then the idea of taking out a personal loan may have already crossed your mind. Whatever your reasons may be, personal loans can be an incredibly helpful tool for many people.

However, most people have many questions about the interest rate that comes with a personal loan. The biggest one being: How do I get the lowest interest rate possible?

At first glance, the interest rate from bank to bank does not seem to vary significantly but do not be fooled. Check out the table below to see the variation of interest paid with slight changes in the interest rate.

As you can see, even a small increment in the interest rate can translate to hundreds of dollars. This makes it all the more crucial to get as competitive a rate as possible when you plan to take out your personal loan.

Factors that influence personal loan interest rates

Before you search high and low for the best interest rates, we think it’s worth knowing how banks produce this number, and what you can do in order to get the best rates.

1. Your credit score

Your credit score plays a big role, if not the biggest, in determining your personal loan interest rates. If a bank can ascertain that you are likely to pay back your loan on time, they will reward you with a lower interest rate.

The table below summarizes average estimated personal loan interest rates according to VantageScore risk tiers, according to Experian. Note that this is only a general guideline as there are other factors that can influence the interest rates that are ultimately set by your respective lenders.

As you can see, having a subprime credit score means that you will be paying more than double the interest rate of a “super prime” credit scorer. Therefore, lowering, or maintaining a stellar credit score, is key to saving money in the long run.

2. Your income

Interest rates on personal loans are significantly influenced by your monthly income. Lenders take into account your monthly income, as well as whether it is steady when they calculate the interest rate. If you have a steady source of income, they are more confident that you can return the loan and will therefore offer you lower interest rates.

On the other hand, a low or unstable income will result in you not being able to get the loan that you need for your house, renovation or any other personal needs, postponing your life plans even further away.

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3. Your existing loans and debt

If you have multiple simultaneous loans going on, a bank might be hesitant to lend you another sum of money. Paying off many loans at the same time can be taxing even on the highest earning individuals. As a result, banks may offer you higher interest rates than usual to protect both you, and themselves.

4. Your relationship with your bank

This one may not come as a surprise to some of you but if you are a long-standing customer with your lending institution, they may offer your lower interest rates due to your relationship.

Banks ultimately want to have a working relationship with you. So if you’ve been a loyal customer with your bank, be sure to contact them first and get their quote, before moving onto other lenders.

How to counter high interest rates

Now that you have some idea of what goes into determining interest rates, here are some ways you can secure the lowest rate for yourself.

1. Explore your options

Regardless of your income or credit score, one of the best ways to guarantee the lowest price is to explore the options available to you.

Reach out to banks you do not typically work with or research online about current rates for people with a similar profile as you. Loan matchmakers like Lendela can also help you quickly compare and contrast the various offerings from different financial institutions.

This way, you can uncover the current market normal and determine which interest rate is the most reasonable. You might be able to negotiate with their primary lender based on the rates they discover other banks are offering with varying degrees of success.

2. Begin building a strong credit score

Even though it might be too late to build a relationship with your bank, it is always not too late to build a good credit score - even if your current score might be subpar. In fact, it may even take as less as 6 months to raise your credit score to AA, which is the best score possible.

One way to do this would be to take on a credit card with low minimum spend and low annual fees. Then, you can use this card to pay for daily necessities like transportation, grocery shopping, or gas. These are generally small ticket items that you can confidently pay back in a month.

As you will always meet your credit card payments on time by doing this, your credit score will increase and banks will offer you a personal loan at a low interest rate.

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3. Watch out for promotions

When scouting for the lowest interest rate, it will serve you well to be on the lookout for promotions the bank may offer. On special occasions such as Chinese New Year or National Day, banks may offer personal loans at a relaxed interest rate, making this the best time to snatch one up. So, if an important holiday is around the corner, waiting for a promotional rate might be a good idea.

Another thing to keep in mind are inflation rates. Interest rates and inflation rates are significantly linked in economics. This is because interest rates are usually used to manage inflation by the central bank as a monetary policy tool (for Singapore, the MAS is the central bank).

A regular financial institution lending out a personal loan will use inflation rates as a rough gauge of how much an interest rate should be. General rule is that when inflation rises, interest rates are likely to rise as well. You can then decide the optimal time to take out a personal loan depending on the current trend of inflation rates.

How debt can ruin your future

Many Singaporeans carry some debt from time to time. However, high-interest debts will often serve to cripple your financial health, if they are not repaid quickly, or restructured into lower-interest debts. Over time, the constant hanging threat of debt payments will increase your stress and even cause tension with your loved ones.

In some cases, out of desperation, people might resort to illegal moneylenders, who will not hesitate to create trouble for your family or property if you cannot service their sky-high interest rates. Not having the money to qualify for loans will also set your future life plans (be it marriage, your deposit for an apartment, or family car) years or even decades back.

This is one of the many reasons we encourage you to secure as low an interest rate as possible on your personal loan. Be sure that you can pay back your loans on time as the cost of extending or defaulting a loan can be high.

Conclusion

All in all, doing your research, taking steps to improve your credit score, and being patient are some of the things you can do to secure the lowest interest rate possible on your personal loan.

However, if you have existing high–interest loans, then knowing how to restructure your debt with other lower-interest loans will decrease the amount of interest you pay per month. Debt can have detrimental effects on your retirement and wellbeing, so obtaining a lower interest rate than what you have right now, is definitely critical to your financial future.

This article was first published in ValueChampion.