Cheap personal loans – when cheap actually means better

What to look for in cheap personal loans

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.

Looking for a personal loan that combines a low rate with minimal fees? Check out Finder's top personal loan picks for August 2024.

How fees can make a cheap personal 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?

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 a lower interest rate makes a cheaper personal loan

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.

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?

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.

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.

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 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

1. 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.
2. 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.
3. 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.
4. 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.

Borrow less

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?

You pay nothing. Finder is free to use. And you pay the same as going direct. No markups, no hidden fees. Guaranteed.

You save time. We spend 100s of hours researching personal loans so you can sort the gold from the junk faster.

You compare more. Our comparison tools bring you more personal loans from across the market.

FAQs

• What is the cheapest way to borrow money?

  Personal loans are typically a cheaper way to borrow money than using a credit card. Cards have much higher interest rates.

  Secured car loans for new vehicles are the cheapest form of personal loan but these are only for people buying cars. And even then you'll need to be buying a car that meets the lender's criteria.

• Which bank has the cheapest loans?

  There's no easy answer to this question. Banks and other lenders are competing for your business and often set rates quite close to each other.

  The best way to find the bank with the cheapest loan is to compare widely and look at not only the rates banks are charging but the fees as well.

• Are online loans cheap?

  Online lenders have lower operating costs than banks and often charge the market's lowest rates. But you will need a good or excellent credit score to unlock the cheapest loans.

  And these days even the biggest banks offer some very competitive personal loan rates, so you really do need to compare widely.

• Can I get a cheap small loan?

  Most lenders set their minimum personal loan size at above $2,000. Borrowers looking for a cheap loan below $2,000 need to be careful. Loans for small amounts put you in the territory of payday loans.

  By law payday lenders can't charge interest. Instead they charge fees based on the amount you borrow. It's quick and easy to get a payday loan but you end up paying quite a lot in fees for a relatively small loan amount.

• What if I find a cheaper personal loan

  f you find a cheaper personal loan on the market you can show this to your preferred bank or lender and see if it will match the rate. It never hurts to ask.

  If you already have a personal loan but it's not as cheap as you'd like, you can refinance to a new personal loan. This means applying for a new personal loan product and discharging the old loan.

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• Disclaimer

  * The products compared on this page are chosen from a range of offers available to us and are not representative of all the products available in the market. There is no perfect order or perfect ranking system for the products we list on our site, so we provide you with the functionality to self-select, re-order and compare products. The initial display order is influenced by a range of factors including conversion rates, product costs and commercial arrangements, so please don't interpret the listing order as an endorsement or recommendation from us. We're happy to provide you with the tools you need to make better decisions, but we'd like you to make your own decisions and compare and assess products based on your own preferences, circumstances and needs.

To make sure you get accurate and helpful information, this guide has been edited by Richard Whitten as part of our fact-checking process.

Written by

Rebecca Pike

Senior writer

Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio

Rebecca's expertise

Rebecca has written 188 Finder guides across topics including:

• Home loans
• Cost of living
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