What is a good personal loan interest rate and how to get one

What constitutes a good personal loan interest rate? Learn how to evaluate a good personal loan rate and where to find the best rates. (iStock)

Interest is the price you pay to borrow money, and the higher the interest rate, the more you’ll pay to borrow. That’s why you should look for lenders with the lowest interest rates.

Of course, interest rates vary widely depending on the type of borrowing you’re doing. For example, credit cards typically have higher interest rates while mortgages usually come with lower rates.

So what is a personal loan interest rate that you could consider good? 

This guide will help you understand what a good personal loan interest rate looks like and how to find a personal loan with an attractive rate. 

Credible makes it easy to compare personal loan interest rates from multiple lenders.

• What is a personal loan?
• What affects personal loan interest rates?
• What’s a good personal loan interest rate?
• How to get the best personal loan interest rate available to you
• How personal loans can affect your credit scores
• Alternatives to personal loans

What is a personal loan?

A personal loan is an installment loan — usually unsecured — that you pay back over a specific time period with interest. You can use personal loan funds for just about any purpose, whether you want to consolidate high-interest debt or pay an emergency medical bill, fund a major purchase, or something else.

You must meet the lender’s minimum requirements to qualify for a loan. Common requirements often include:

• Credit score — Credit score requirements for personal loans vary depending on the lender. Many lenders prefer borrowers with good or excellent credit scores (FICO score of at least 700). But plenty of lenders approve borrowers with fair credit (FICO score between 640 and 699) or even bad credit (FICO score below 640). Of course, the higher your credit score, the better your odds of getting approved with a low interest rate.
• Payment history — Lenders may pull your credit report to review your payment history and how responsibly you manage credit. Your report shows lenders a wealth of credit information, including how many accounts you have, how much credit you’re using, and if you pay your accounts on time.
• Income — You might have to provide pay stubs, bank statements, or other proof of income to demonstrate you have the financial means to repay the loan. For example, Credible partner lender Upstart requires a minimum income of $12,000 per year, while LendingPoint requires $20,000 in annual earnings. Some lenders have no minimum income requirements.
• Debt-to-income (DTI) ratio — DTI is the percentage of your gross monthly income that goes toward your monthly debts. Lenders use this metric to predict your ability to make payments if they lend you money. While a DTI of 36% or below is ideal, many lenders approve applicants with higher DTI ratios.

What can I use a personal loan for?

You can use personal loans for almost any purpose, such as:

• Debt consolidation
• Unexpected expenses
• Large purchases
• Medical bills
• Home improvements or repairs
• Vacations
• Small-business costs
• Weddings
• Divorce fees
• Funerals

But you can’t use personal loan funds for certain purposes, including gambling and illegal activities. Most lenders also forbid you from using a personal loan for education expenses like college tuition, although you could use a personal loan to pay for related expenses, like textbooks and housing.

Additionally, many conventional and FHA mortgage lenders prohibit you from using personal loan funds as a down payment on a home. Because you’d be responsible for two debts — the mortgage and the personal loan — lenders may believe there’s a higher risk that you could default.

What affects personal loan interest rates?

A number of factors influence personal loan interest rates, such as: 

• Supply and demand — Interest rates generally rise when there’s more demand in the marketplace for money or credit, and fall when demand is lower.
• Inflation — When the inflation rate rises, lenders must impose higher interest rates to offset the decrease in the purchasing power of money they receive in the future.
• Federal Reserve — The Federal Reserve sets target interest rates, which are the fund rates at which banks lend to each other. When the Fed raises or lowers interest rates, the cost of borrowing rises or falls accordingly, which is reflected in the interest rates lenders offer borrowers.

As mentioned earlier, the interest rate you receive for a personal loan is influenced largely by your credit score, payment history, income, debt-to-income ratio, and employment stability. Lenders consider these and other factors to help them determine the likelihood that you’ll repay the loan as agreed.

Additionally, other primary forces work at the lender level and loan level to affect interest rates:

• Competition — When competition for credit and loan products is high, lenders have an incentive to sweeten the deal with low interest rates and other perks. For example, a lender may give you an autopay discount or allow you to skip a payment after making on-time payments for a specified period.
• Minimum income requirements — Lenders impose income requirements to ensure you have the financial resources to repay a loan. Lenders may reserve their lowest rates for those with higher incomes and good to excellent credit.
• Loan terms — As a general rule, the longer the loan term, the higher the interest rate.
• Loan amounts — The higher the amount of a personal loan, the more risk it presents to the lender. As such, loans for higher amounts often come with higher interest rates than loans for smaller amounts.
• Collateral — Because secured loans require collateral, they often feature lower interest rates. The collateral reduces the lender’s risk of loan default since it can always repossess the collateral and recover some or all of its financial loss. Most personal loans are unsecured and don’t require collateral.

What is APR on a personal loan?

When comparing personal loans, you may see offers that include the interest rate, annual percentage rate (APR), or both. 

The interest rate is simply the amount a lender charges you to borrow money, based on a percentage of the loan principal. APR differs from interest rate because it includes both the interest rate and any loan fees, such as application, processing, and origination fees. The APR figure represents the total annual cost of borrowing.

With Credible, you can see your prequalified personal loan rates in minutes, without affecting your credit.

What’s a good personal loan interest rate?

A good interest rate on a personal loan is one that beats the national average. Since 2016, the average interest rate on a 24-month personal loan has hovered in the 9% to 11% range, according to Federal Reserve data. 

Depending on your credit, you may receive offers with interest rates as low as 4.99% up to 36%. You can find information on today’s average personal loan interest rates from this Credible® resource.

Here are a few things to look for when you’re evaluating a loan or interest rate:

• APR — As mentioned earlier, the APR is the total cost of the loan, including the interest rate and fees. The lower the APR, the lower your cost to borrow money.
• Fixed or variable — Most personal loans come with fixed rates that are ideal if you want payments that remain the same. With variable-rate loans, the interest rate generally starts out low but can increase due to market forces.
• Loan term — Shorter loan repayment terms usually have lower interest rates and less time for interest to accrue, saving you money in the long haul.
• Fees — On top of the costs wrapped into the APR, see if the lender charges late fees, prepayment penalties, or other fees that add to the cost of the loan.
• Payment amount — Make sure you can comfortably make the payment each month. You can get a lower payment with a longer loan term, but remember, doing so will cost you more in interest over the life of the loan.

How to get the best personal loan interest rate available to you

With a few strategic moves, you may be able to qualify for loans with the best available interest rates:

• Pay down other debts. Lowering your debt obligations will lower your debt-to-income ratio, a key factor lenders use when approving loans and setting interest rates.
• Take steps to improve your credit score. As a rule, lenders reserve their best personal loan rates to borrowers with the highest credit scores. Consistently making debt payments on time and lowering your credit utilization are two effective ways to improve your credit score.
• Determine exactly how much you need. Smaller loan amounts typically come with lower interest rates since higher amounts expose the lender to more risk. For this reason, you should only apply for the minimum amount you need. Even if you’re approved for a higher loan amount, that doesn’t mean you should accept it, especially if you don’t need the full amount. Paying interest on money you don’t need makes little financial sense.
• Decide how much of a monthly payment you can afford. A personal loan calculator can help you estimate what your monthly payments might be. Make sure the payments are affordable and leave you enough of a financial buffer to comfortably pay all your bills on time each month. If you can afford the higher payments that come with a shorter-term loan, you’ll potentially save a lot of money in interest.
• Comparison shop rates from different lenders. One of the best ways to get a better interest rate is to shop around and compare rates from different lenders. Credible’s marketplace makes it easy to compare personal loans side-by-side without hurting your credit.

How personal loans can affect your credit scores

A personal loan can help you improve your credit in several ways. For example, by making regular on-time payments each month, you’re improving your payment history, which accounts for 35% of your FICO credit score. 

What’s more, if you use a personal loan to consolidate credit card debt, you could potentially lower your overall credit utilization ratio, which makes up 30% of your credit score. Your credit utilization ratio compares the amount of revolving credit you’re currently using to the total amount of revolving credit available to you. Personal loans aren’t revolving credit, so they don’t factor into your credit utilization ratio.

Also, adding a personal loan to your credit report could improve your credit if it adds to the mix of credit types in your profile.

As you compare personal loans, lenders may perform soft inquiries on your credit report to give you an idea of what you’ll qualify for, which won’t affect your credit. But once you start submitting applications, lenders will initiate hard inquiries, which can cause a temporary dip in your credit score. Multiple inquiries may cause your credit score to drop. That’s why it’s a good idea to submit your applications within a week or so, as most credit models consider this as rate shopping and minimize its impact on your credit score.

Keep in mind that when you’re approved for a personal loan, it can reduce the average age of your credit history. The length of your credit history contributes to 15% of your FICO credit score.

With Credible, you can compare personal loan interest rates from multiple lenders.

Alternatives to personal loans

Personal loans are a convenient and flexible option to borrow money. But they’re not the only option. Here are a few alternatives to personal loans you may wish to consider:

• Home equity loan or line of credit — If you own a home with equity, you may be able to borrow some or all of that equity. If your credit is sufficient, you may be eligible for a home equity loan or a home equity line of credit (HELOC). Since your home secures the loan, it may come with a lower interest rate. The downside is that if you’re ever unable to repay the loan, the lender could repossess your house.
• Payday loan — This type of loan is rarely a good idea. Even though payday loans can provide you with quick cash, they also come with fees that equate to exorbitant annual percentage rates, often in excess of 400%. What’s more, the entire balance is usually due on your next payday, making these loans an extremely risky option.
• Title loan — Car title loans are short-term loans, usually for a month or less. It can be challenging to repay the loan in such a short period, especially if you’re borrowing a significant amount. The interest rate is low to begin with, but it can rise significantly if you need an extension to repay the loan. And if you’re unable to pay, you risk the lender taking your vehicle.
• Peer-to-peer lending — Peer-to-peer lending is an alternative to lending options from traditional banks, credit unions, or online lenders. Peer-to-peer websites connect individual borrowers and lenders, referred to as investors. These investors loan money to applicants who meet their qualifications. Keep in mind that you may face additional terms and fees, and the interest rate may be higher than what traditional lenders charge if you have poor credit.