How do credit scores affect personal loan rates?

Want to save up to thousands of dollars in personal loan costs? Canstar research shows how keeping on top of bill payments could be an easy money saver when applying for a loan. 

Canstar researched and rated personal loans – including car loans – for the 2018 Personal Loan Star Ratings. The three providers who received a five-star rating all have a range of rate offers for their loans, depending on the customer’s credit rating.

We take a look at the power of a good credit score when it comes to personal loans.

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What is a credit score?

Before we get into the nitty gritty of how credit scores impact on personal loan options available to you, you might be wondering what a credit score is. Essentially, a credit score is a number between 0 and 1000 that indicates how reliable you are at paying your bills on time.

A credit history report summarises your payment history and it includes payments for credit cards, mortgages, car finance and hire purchases. A credit history report might also include information on other bills, such as electricity, gas and phone accounts. If you always pay off your bills on time, you’re more likely to have a better credit score than a borrower who often pays their credit card late, for example.

We have plenty of guides on how to check your credit score for free, as well as how to avoid black marks on your credit score.

Why is a good credit score important?

A good credit score is important because it means lenders look more favourably at any future applications for loans. Increasingly, lenders are also splitting up their deals according to different credit score levels.

Canstar has crunched some numbers, so you can see what this form of “credit score sensitive” pricing could mean for your back pocket.

According to Canstar’s database, three personal loan providers base their loans on a customer’s credit score: Harmoney, NZCU Baywide and The Co-Operative Bank.

These providers offer interest rates from as low as 6.99% to as high as 29.99% – depending on your credit score and other lending criteria. These rates are according to Canstar’s personal loans database, as at the time of the star ratings report.

Here’s a breakdown of how a customer’s credit score impacts on what they would have to pay for a personal loan, based on a $10,000 loan over three years.

Credit Sensitive Personal Loan Savings
  Rate* Upfront Fees Monthly Payment Total Interest Total Cost
Excellent Credit Average Rate: 8.63% $216.67 $316.28 $1,386.01 $1,602.68
Poor Credit Average Rate: 21.29% $216.67 $378.24 $3,616.69 $3,833.36
Source: Data source from the 2018 Personal Loans Star Ratings. Figures based on unsecured loans for a value of $10,000 over 3 years with monthly repayments. *Refers to average taken over credit sensitive products with the midpoint of the rates available at the various credit bands. Only rates considered in Canstar’s Star Ratings have been considered.

So, this means that the average difference between an excellent credit score and a poor credit score is 12.66% and could cost you more than $2000 over the life of a three-year loan for $10,000!

So, it’s well worth checking your credit score status and making sure it’s in the best possible shape!

How do you improve your credit score?

If your credit score is not looking too crash hot, all is not lost, there are ways you can take a metaphorical eraser to those nasty black marks.

Canstar’s top tips for keeping a clean credit rating:

Keeping a clean credit rating

Meet all of your payment obligations Meet all of your payment obligations This means ensuring you pay off your credit card, any higher purchases, or other loan repayments.
Seek help if you can’t meet repayments If you are struggling to pay off your debts, seek help as soon as possible, such as from a financial advisor or talking to the lender.
Check your credit record regularly Check your credit record regularly Knowing what is on your credit record means you can avoid finding out about any skeletons in the closet at the same time as the bank does.

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