A low APR loan means that the customer will pay less interest over the full borrowing term. The rate of interest charged by a financial institution is their assessment of the risk of default that customer represents. The cost of borrowing has gone up since the financial crisis and a number of lenders have stopped offering affordable loans completely. This position will change once unemployment starts to fall.
Tiered Lending and Low APR Loans
Lenders will no longer simply approve or reject someone for a cheap bank loan, they charge different rates of interest to customers. Tiered lending has become increasingly popular with lenders as it allows them to manage risk more effectively than a flat rate system. The risk of default increases proportionately as the customer’s credit rating falls so the APR now reflects this.
Credit Scoring for Low Cost Loans
When a customer fails to repay their debt on time, the lender reports this matter to credit reference agencies. Each borrowing transgression will result in a lower credit rating. When a customer applies for a low APR loan, the lender performs credit scoring to decide whether or not to grant approval. Whilst it may be possible to get a secured homeowner loan with bad credit, a lender is very unlikely to agree to cheap unsecured loan when uncertainty exists because they don’t have any collateral.
Low Interest Rate Loan with No Credit History
Whilst this may surprise some customers, having no credit history is almost as likely to result in a decline as having poor credit. This is because lenders want to be able to assess risk and they are unable to do if a potential customer has never borrowed money before. The cheapest bank loan rate will be higher but, provided repayments are made punctually, will become cheaper in the future.
Making Too Many Cheap Bank Loan Applications
It is important to spend time deciding which low cost loan to apply for. Use a price comparison site, such as moneysupermarket.com, to identify an affordable loan with the best features. Applying for lots of different low APR loans in a short timeframe will lead to rejection. This is because it sets off alarm bells that a potential customer may be having financial difficulties and be a likely candidate for default.
Affordable Loans and Employment History
The longer the applicant has been in the same job, the more likely they are to be approved for a low interest rate loan. This is because a stable income is less likely to lead to default. A customer who is still in their probationary period or in temporary employment will lead to rejection. Self employed people will normally be expected to provide a minimum of 12 months of business accounts.
The Cheapest Loan Rate for Customers with Existing Debt
A low income to debt ratio is important to a lender because, the greater the borrower’s existing financial obligations relative to their income, the more likely they are to default. That person has less scope to be able to manage their debts should personal circumstances change. An income to debt ratio of in excess of 36% will normally lead to rejection for a low APR loan so it’s important to pay down debt before borrowing more money. The lower the ratio the greater the likelihood of approval for a loan.