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? 

In this article:


What are interest rate ranges on personal loans?

A personal loan interest rate range is simply the minimum and maximum 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.

The comparison table below shows some of the unsecured personal loans on Canstar’s database with links to providers’ websites. The results shown are based on a three-year loan of $20,000 in NSW and are sorted by Star Rating (highest to lowest), then comparison rate (lowest to highest). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement before making a decision. Use Canstar’s personal loans comparison selector to view a wider range of personal loan products.

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.

→ You can check your credit score for free

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.

The comparison table below shows some of the car loans on Canstar’s database with links to providers’ websites. The results shown are based on a three-year loan of $20,000 for a used car in NSW and are sorted by Star Rating (highest to lowest), then comparison rate (lowest to highest). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement before making a decision. Use Canstar’s car loans comparison selector to view a wider range of car loan products.

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.

Loan Interest rates
The interest rate you negotiate for a personal loan or car loan may be in a range, with factors such as your credit score considered by lenders in determining your credit-worthiness. Image credit: William Potter, Shutterstock.

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.

Below Average  Average Good Very Good Excellent
Equifax score range 0-505 506-665 666-755 756-840 841-1,200
Source: Equifax

 

Below Average  Fair Good Very Good  Excellent
Experian score range 0-549 550-624 625-699 700-799 800-1,000
Source: Experian

 

Zero score A low score Room for improvement Good Great Excellent
Illion score range 0 1-299 300-499 500-699 700-799 800-1,000
Source: 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.

In Canstar’s most recent annual Personal and Car Loan Star Ratings, our researchers assessed 229 new car loans, 215 used car loans, 60 secured personal loans, and 129 unsecured personal loans, with 54 loan products awarded a 5-Star Rating. Some of the 5-Star Rated unsecured personal loan products required an ‘excellent credit’ rating, or ‘A+’ for eligibility.

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
MoneyPlace
Category Fixed interest rate Comparison rate*
A – Excellent Credit 7.65% – 10.49% 7.65% – 12.42%
B – Very Good Credit 10.99% – 12.99% 13.11% – 15.87%
C – Good Credit 13.79% – 16.99% 17.06 – 20.70%
Plenti
Category Fixed interest rate Comparison rate*
Excellent Credit 6.49 – 8.79% 7.50 – 9.82%
Very Good Credit 8.89 – 10.89% 10.97 – 13%
Good Credit 10.89– 13.89% 13 – 16.04%
SocietyOne
Category Fixed interest rate Comparison rate*
Excellent Credit 7.50% – 9.99% 9.57% – 12.10%
Very Good Credit 10.49% – 11.49% 13.29% – 14.31%
Good Credit 12.29% – 13.79% 15.12% – 16.65%
Source: Canstar, 1/9/2020. *Read the Comparison Rate Warning. Examples taken from Canstar’s database and shown in alphabetical order by provider, with fixed interest rate and comparison rates 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.

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.

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. There may also be temporary financial hardship support available to you from your bank during the coronavirus pandemic and recession. Speak to your bank directly to find out what support may be available.

Borrower calling bank
Negotiating with your provider or bank directly is a proactive step existing customers can take towards securing a better interest rate on personal loans. Image credit: Foxy Burrow, Shutterstock.

If you are in financial difficulty, it is important to seek support as soon as possible. Sarah Brown-Shaw, a financial counsellor at the National Debt Helpline, has shared her advice about 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.


Original author: William Jolly.
This article was reviewed by our Sub Editor Tom Letts and Finance Editor Sean Callery before it was published, as part of our fact-checking process.

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