From the time you started receiving your first allowance, you’ve understood a very simple rule in economics: Get as much as you can and pay as little as possible to get it. That’s true even in the adult personal loan world. You borrow somebody’s money at the lowest possible interest rate.

But it’s not always easy to get an ultra-low rate. So where do you go and how do you lock in the most favorable terms?

1. Don’t Go to the Bank (Usually)

Big retail banks are often the first lenders that comes to mind. While they do find it valuable to offer personal loans, the relatively small amount of money they make on them mitigates their incentive to offer competitive interest rates in most circumstances.  It doesn’t hurt to ask (especially if you already have a relationship with that institution), but don’t be surprised if the rate is a couple of points higher than what you will find elsewhere. There are exceptions: Wells Fargo, a venerable firm that's getting into online banking in a big way, is often cited for its highly competitive rates. (See 6 Biggest Banks Offering Personal Loans.)

2. Check Out A Credit Union

A credit union’s non-profit status often allows it to offer lower rates and fees than a local bank's. That'll pass some savings on to you. But credit unions are not immune from all of the banking regulations that can result in them having to charge those pesky fees in the first place. So don't stop shopping.

3. Look Online

You may find the best rates on the internet. There are an increasing number of digital lenders out there, and their lack of overhead often means they can offer better terms than their brick-and-mortar counterparts. For example, LightStream, the online consumer lending division of SunTrust bank, was offering loans for as little as 1.99% in November 2015. Of course, you need to do due diligence on these types and their terms; it doesn't hurt if one is affiliated with a physical institution, as LightStream is.

4. Peer-to-Peer

The crowdfunding craze has caused peer-to-peer lending to explode in popularity. Websites like Lending Club  allow individuals to make personal loans to people at rates ranging from around 5% to 30%, depending on the length of the loan and their credit worthiness. Peer-to-peer isn’t necessarily a better deal than more traditional lenders, in terms of rates, and loans often have an origination fee between 1%-5% of the sum being borrowed. Still, it might offer options to those who have a less-than-stellar financial history.  See Peer-To-Peer Lending Breaks Down Financial Borders.

5. Consider a Cash Advance

Watch the mail for credit cards offering cash advances at an introductory 0% rate, or check the Internet for current offers. Money for free: You can't beat that. You may only get that rate for 6 to 12 months, though, so your timeframe has to be short. Be aware that the interest rates on credit card balances are much higher than for personal loans, so this strategy will only save money if you need the cash for a very short time and know you can pay it back while the intro rate is still in effect. See How a Cash Advance Works for details.

6. Read Reviews

Because the personal loan lending market might involve using lesser-known lenders to get the best rate, reading other peoples’ experiences with them is an essential step. Google the lenders you're considering before you sign, just to see if there's anything positive or negative you should investigate. User reviews aren't infallible, of course; use them to raise questions you need answered.

Additional Tips

The annual percentage rate (APR) you pay for borrowing money, is important but not as important as many people believe. You also need to factor in the term of the loan (how many years the loan is for). Often, a shorter loan at a higher rate works out to be cheaper, overall, than a longer loan at a lower rate. Let's say that for a loan of $10,000, you have a choice between paying an APR of 10% with a five-year payback or 15% with a three-year payback. At first glance, the former seems better; 10% is less than 15%, right? But if you do the math, you see that you'll be paying $5,000 in total interest ($10,000 ÷ 10% x 5) with that loan, vs. $4,500 with the latter one ($10,000 ÷ 15% x 3).

You should also examine how interest on the loan is calculated. Before signing any paperwork, ask if the bank precomputes interest or calculates using simple interest.  Simple interest uses the actual balance outstanding on the day your payment is due. So, if you starting paying more than your regular monthly amount, the interest component of the payment should get smaller as the size of the outstanding loan shrinks. Precomputed interest uses the original payment schedule (and the original loan balance) to figure interest, and it never varies, even if you increase your payments.

This could have a notable effect on the overall sum you shell out. If you plan to pay off the loan early, you want simple interest. If you plan to hold the loan to maturity, the precomputed method won't matter and giving more weight to APR is fine. What is most important is the total cost of the loan over time. Just to be sure check out any prepayment penalties or other hidden fees. 

The Bottom Line

Banks are usually the first lender that comes to mind, but they often aren’t the best source. Do some detailed shopping – at other institutions and online – before accepting any loan; you might be surprised at how much the terms can vary. Before you move ahead, think through what's best by reading When Are Personal Loans a Good Idea?  and 8 Possible Risks of Unsecured Personal Loans.

Any time you’re interest-rate shopping, you have to remember that your credit score heavily affects your rate. That’s no different for personal loans. To get the best rate, you have to have a high score. Before shopping for a rate, check out yours: If it’s higher than 740, generally speaking, you’re probably eligible for the most advantageous terms. For more, see What Is A Good Credit Score?

 

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