How to qualify for low-interest personal loans

The higher your credit score is, the more likely you are to qualify for a personal loan with a low rate. (Shutterstock)

When you need to borrow money, a personal loan can come in handy. If you’re able to land a lower interest rate, it can save you a lot of money over the life of your loan. Interest rates vary based on how much you want to borrow, the length of your loan, your credit score, and other factors. The higher your score, the less interest you’ll likely pay. 

Here’s how low-interest loans work and how to improve your odds of qualifying for a more-favorable interest rate. 

With Credible, you can compare personal loan rates to see what rate you may qualify for.

• What is an interest rate?
• How to qualify for low-interest personal loans
• How to improve your credit score
• Is a personal loan right for you?

What is an interest rate?

Borrowing money comes at a cost. When you take out a loan, lenders will charge you an interest rate on top of the loan amount you borrow, which is expressed as a percentage. If the interest rate is fixed, you’ll pay the same amount over the life of the loan. If the interest rate is variable or floating, the amount you’ll pay can change over time with market fluctuations.  

When you have a lower interest rate, you’ll pay less to borrow money over the life of the loan. Your interest rate is included in your annual percentage rate, or APR, which represents the entire cost of borrowing money for a year. APRs also include any fees or costs associated with the loan, so it’s a more accurate representation of how much you’ll pay than your interest rate alone. 

Personal loans often come with lower interest rates than credit cards. The average interest rate for a 24-month personal loan was 9.09% as of November 2021, while the average credit card interest rate was 16.44%, according to Federal Reserve data. 

How to qualify for low-interest personal loans

While more lending products on the market are designed for consumers with good credit scores, having a lower credit score doesn’t make borrowing money impossible. 

Qualifying for a low-interest personal loan is generally easier when you have a strong credit history. To qualify for the best possible interest rates, you’ll need a good to excellent credit score (a FICO Score of 740 and above). If you have a poor credit score, you may find it hard to qualify for a low-interest personal loan. Many lenders work with borrowers who have lower credit scores, but you can expect to pay higher interest rates and fees.  

If you’re unsure what interest rates you might qualify for, it can be helpful to prequalify for a personal loan. Plenty of lenders offer personal loan prequalification, which only involves a soft credit inquiry, so you won’t hurt your credit by applying. Once you have a few prequalification offers, you can see which lender is most likely to offer you the best rates and loan terms (though prequalification offers aren’t a guarantee of loan approval).  

You can use Credible to compare personal loan rates from various lenders, without affecting your credit.

How to compare personal loan offers

Keep these things in mind when you’re shopping around and comparing personal loan offers: 

• Interest rates — The higher the interest rate, the more you’ll pay to borrow money. You should try to secure the lowest rate you can to save on interest.
• Loan amounts — Each lender will be willing to lend a different amount of money to borrowers. It’s important to find a lender that can provide you with the amount you need.
• Repayment terms — Confirm how long each lender will give you to pay off your loan. The repayment term of a loan can greatly affect how much your monthly payments will be, as well as how much interest you’ll pay. While longer-term loans have lower monthly payments, they also lead to paying more interest.
• Fees — Double-check what fees each lender charges. Some common ones include origination fees for processing your loan, late fees if you miss a payment, and prepayment penalties for paying off your loan early.
• Discounts — Can the lender offer you any discounts that will help you save money on the loan? It never hurts to ask.

How to qualify for a low interest rate with poor credit

If you have poor credit, it’s still possible to qualify for a personal loan — but you can expect to receive a higher interest rate. If you’re struggling to qualify for a personal loan at an affordable interest rate, applying with a cosigner who has good to excellent credit can help you get a lower rate, better loan terms, or both. 

But be careful before adding a cosigner: If you fail to make payments on your personal loan, your cosigner will be responsible for them. If both of you fail to make the loan payments, then both your credit scores will take a hit. 

How to improve your credit score

If you can hold off for a bit before applying for a personal loan, you can take some steps to improve your credit score — and your odds of qualifying for a loan with more-favorable interest rates and repayment terms: 

• Check your credit. Sometimes errors can appear on your credit report that hurt your credit score. Before applying for any form of credit, review your credit report from each of the three main credit bureaus — Equifax, Experian, and TransUnion — to make sure there are no errors that are bringing your score down. You can dispute any suspected errors with the credit bureau and if you’re found to be correct, the errors will be removed from your report, which can help build your credit score.
• Pay all your bills on time. Paying your bills on time each month is one of the best ways to build a positive payment history and improve your credit score over time. If you struggle to keep track of when your bills are due, consider setting up automatic payments or electronic reminders. If you’ve missed some payments in the past, get current with those bills and try to stay current to improve your credit score.
• Pay down credit card balances. The lower your credit utilization ratio is, the more your credit score will benefit. Your credit utilization ratio compares how much available revolving credit you have to how much of that available credit you’re currently using. Ideally, you’ll keep your credit utilization ratio below 30%. To lower your credit utilization ratio, pay down any existing credit card debt and continue to pay off your balance each month.
• Avoid new loans when possible. Don’t take out new forms of credit unless absolutely necessary when preparing to apply for an important lending product like a personal loan. Lenders view taking out multiple new credit products in a short time period as a sign of financial instability, so it’s best to focus on applying for one type of credit product at a time.

Is a personal loan right for you?

A personal loan is a convenient and flexible lending product. You can use personal loan funds to finance nearly any purchase you wish, like covering the cost of home repairs, funding a wedding, or paying medical bills. 

But taking out a personal loan is a big financial step and may not be the right fit for everyone. It’s up to you to decide if the cost of borrowing the money is worth what you intend to spend it on. If you can wait, you may be better off saving for the purchase or expense so you don’t have to pay any unnecessary interest or fees by borrowing money. 

Remember, the better your credit score is, the lower the interest rate on your personal loan is likely to be. Take your time to shop around and compare multiple personal loan lenders so you can secure the best deal for your unique situation. If you can hold off on applying for a personal loan, you’ll have even more time to improve your credit score, which can lead to better personal loan options and lower interest rates down the line.

When you’re ready to apply for a personal loan, visit Credible to quickly and easily compare personal loan rates.