Interest rate ranges: How is your rate determined?

You may have seen a personal or car loan advertised with an interest rate given as a range. So, what are these ranges, what determines your rate and how can you score a better deal?

What are interest rate ranges on personal loans?

A personal loan interest rate range is simply the minimum and maximum interest rates that a lender may charge on one of its personal loan products. This means that if you successfully apply for a particular personal loan from an institution, you could be charged any interest rate in the lender’s advertised range for that product. The exact rate a lender charges typically depends on a borrower’s personal circumstances, including the details of their personal loan application.

Compare more personal loans

How is your personal loan or car loan interest rate determined?

The interest rate you’ll be offered will generally be based on how much the lender trusts you to make loan repayments on time, which partly depends on your credit score. There may be other factors taken into consideration too, such as whether your personal loan will be secured or unsecured and if you have a guarantor, according to Moneysmart. National Australia Bank (NAB), for example, considers factors such as your credit history, information given on the application form and any details it has on file (for existing customers) in deciding the interest rate to charge personal loan customers. Whether you are buying a car, want to consolidate debt or have other expenses, negotiating a better interest rate on your personal loan could save you a lot of money in the long run.

What is a credit rating or score?

Your credit rating (or credit score) is a numerical representation of your perceived trustworthiness as a borrower. It sums up a wide range of information on your lending, borrowing and bill-paying history into a single number. Lenders often use this information to help them decide if lending you money is worth the risk.

Get your free credit score

What are the credit score bands?

Here’s a breakdown of the credit score ranges of three of Australia’s largest credit score providers, Equifax, Experian and Illion. A higher number means a better credit score, and a better credit score means you’re more likely to be perceived as trustworthy by lenders. A lower score, on the other hand, means that lenders may view you as risky, which in turn may result in you paying a higher interest rate, or not being approved for your preferred loan.

← Scroll to view →

Equifax credit score bands

← Scroll to view →

Experian credit score bands

← Scroll to view →

Illion credit score bands

Sources: Equifax, Experian, Illion.

How does my credit score affect interest rate ranges?

Depending on how a lender assesses your application as a borrower, and considering various relevant factors, such as your credit score, the interest rate range available to you for a personal loan may change. For example, a lender may group applicants using categories such as excellent, good, average and below average; letters such as A, B, C, D; or colours such as orange, blue and green to differentiate borrowers based on criteria including their credit scores as part of the loan application process.

Here are some example credit score and interest rate range categories from a variety of providers on Canstar’s database, for applicants seeking a $20,000 unsecured personal loan with a three-year term in NSW, at the time of writing.

Credit score and interest rate ranges – unsecured personal loans

← Scroll to view →

Source: Canstar, 25/3/2022. *Read the Comparison Rate Warning. Examples taken from Canstar’s database and shown in alphabetical order by provider, with fixed interest rate and comparison rate ranges applying at the time of writing. The comparison rate on personal loans includes most of the fees and charges on the loan in question, such as establishment fees. Specific interest rate and comparison rate ranges for personal loans will differ from provider to provider and other terms and conditions may apply. Contact the provider for these details.

Compare personal loans

How can I get a better interest rate on my personal loan?

If you don’t have a loan yet, working towards improving your credit score may help you put yourself in a stronger position to get a better interest rate if and when you do decide to apply.

Get your free credit score

Personal loans usually have lower interest rates than credit cards, but like any credit product, there are still risks involved, and their interest rates are considered high compared to other credit types, according to the National Debt Helpline. Before you go ahead with a loan, you may like to consider writing a budget. You could also use a tool such as Canstar’s Personal Loan Repayment Calculator to help ensure you can make repayments in the long run.

For existing customers, negotiating with your provider could be an excellent step to take if you want to get a better interest rate on a personal loan. If you are in financial difficulty, it is important to seek support as soon as possible. Discover steps to take if you can’t pay your personal loan repayments.

What else should I consider in choosing a personal loan?

Canstar releases annual Personal and Car Loan Star Ratings that you may find helpful to identify products that represent outstanding value overall. With Canstar’s unique methodology, both cost and features are compared across personal and car loan products in our database for Australian consumers.

There is also peer-to-peer (P2P) lending, which provides an alternative to banks for a range of borrowers and loan types in the Australian alternative finance market. You can find out more about P2P lending in Australia to help in considering different options that may be suitable for your personal needs.

Compare personal loans

Original author William Jolly.

Cover image source: HAKINMHAN/Shutterstock.com