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Every lender will have their requirements for determining an interest rate, but the best personal loan interest rate for you will reflect your credit score, annual income, and reasons for wanting loan funds. Read on to learn about good personal loan interest rates.
- What is a personal loan?
- How do lenders determine personal loan interest rates for borrowers?
- How to get the best personal loan rate
- Average online personal loan rates according to your credit score
- Personal loan rates at banks vs. credit unions
- The bottom line
What is a personal loan?
A personal loan is money you request through an application from a financial institution like a bank, online lender, or credit union, which you will commit to repayment terms over monthly installments. A loan term for a personal loan is typically repaid with interest over a certain number of years. Personal loans can be unsecured or secured loans.
Like anything, personal loans have their pros and cons. It is recommended that dipping into your savings to make big purchases should always be the first approach, but if that isn’t an option, a personal loan can be taken out for various reasons.
The caveat of taking out a personal loan is that an interest rate is attached to the loan. There are many factors that a lender considers before they grant a personal loan amount and determine an interest rate.
How do lenders determine personal loan interest rates for borrowers?
Currently, personal loan interest rates range from 3.0% to 35.99%. Lenders have formulas for determining interest rates, but there are a few general things that get considered:
- Credit score
- Credit history
- Annual income
- Debt to income ratio
- Type of lender
Some lenders will consider other information such as the schools you have attended, your type of occupation, and where you live. Many lenders will also want to know what you will use the loan for and will factor that into their decision.
How to get the best personal loan rate
Often, the best rates go to those with high credit scores, excellent creditworthiness, and a steady flow of income.
To be prepared before applying for a personal loan and shopping around for the best interest rates, consider the following:
- Reviewing your credit score.
- Adjust your requested loan amount.
- Inquire about discounts.
- Find a no-fee lender.
- Add on a co-signer or collateral.
- Get prequalified.
Review your credit score
Reviewing your current credit score will help to give you a good idea of where your credit stands and if you will even qualify for a loan. If you think your credit history might not cut it or simply needs to be a little higher, this might be the first place you will start before applying for the loan.
As well, taking a look at your credit report will also help to give you an indication if a lender will approve you. If you have not made on-time credit card payments in the past, this can be something that a lender will take into consideration when reviewing possible interest rates.
Adjust your requested loan amount
Sometimes, you may need to adjust your requested loan amount to get better loan options. If you ask for a large loan amount and a longer loan term, this can cause a lender to assign you a higher interest rate.
Knowing how much you can afford monthly to repay a loan is very important. With a higher fixed rate interest, your monthly payments will be higher.
Inquire about discounts
Lenders may offer discounts for a few different reasons. Many online lenders will offer a discounted rate if you opt for automatic loan payments. This means that once the loan term and interest rate are set, you can choose to have those loan repayment amounts taken out of your bank account automatically on the same day every month. By doing this, you will receive some sort of perk, like a discount.
As well, some lenders will offer discounts for existing account holders. For example, if you are banking with a particular bank by holding a checking and savings account, they may give you a discount for taking out a personal loan versus another bank.
Find a no-fee lender
The personal loan APR usually includes all fees, like the origination fee. Origination fees can cover the bank out-of-pocket costs like verifying your employment and income, processing your application and documentation, preparing your legal documents, and underwriting the loan.
If you choose a lender that does not charge an origination fee, you can avoid an interest rate inflated by these fees.
Add on a co-signer or collateral
Anyone with a bad credit score who cannot qualify for a loan on their own can add on a co-signer to have a higher chance of getting approved. A co-signer is simply an individual who will commit to paying your loan if you cannot repay it.
If you choose to add on a co-signer, they will have the same application process as you and should typically qualify with a higher income, good credit score, steady income, and signed commitment to paying your loan.
In adding on a co-signer, the lender will be more inclined to grant a better interest rate on your loan.
Another way someone with a low credit score can bring down their APR is by providing collateral. This can be in the form of an owned property like a house or a car. Keep in mind that choosing to put up collateral means that you are signing over the rights of this property to the lender if you default on your loan.
With all of the above considered, you can check your estimated personal loan interest rate before committing to a specific lender by getting prequalified. To do this, the potential lender will have to run a soft inquiry on your credit history that may temporarily affect your credit score.
To get prequalified, you must provide information about your credit, income, employment, how much you want to borrow, and why. In return, the lender can tell you your potential approved loan amount, loan term, and interest rate.
Average online personal loan rates according to your credit score
Each loan has a specific APR (annual percentage rate). For example, mortgage rates can frequently change to keep up with current market value, but personal loans have remained steady and on the higher end. Below is the estimated APR based on FICO scores.
|State of Credit||Score Range||Estimated APR|
Excellent Credit Rates
Based on 2022 statistics, the lowest monthly average rates for “excellent credit” borrowers who desired a personal loan was 8.7% to 12.4%. To secure these low personal loan rates, you must have a high income and a long credit history reflecting on-time payments.
Good Credit Rates
The lowest monthly APR range for “good credit” borrowers who submitted a personal loan application was 12.5% to 19.5%. Lenders will look for good credit, low debt to income ratio, and a good standing credit history to secure lower interest rates.
Fair Credit Rates
The average monthly rate for a “fair credit” borrower” is 21% to 27.7%. For “fair credit” borrowers who may not have the best credit scores, lenders will usually recommend a co-signer or collateral. With one of these add-ons, lenders will consider approving a loan for a lower interest rate.
Poor Credit Rates
“Bad credit” borrowers can expect an APR of 26% or higher. With poor credit scores, lenders may not even consider approval. Something to consider would be requesting low personal loan amounts and short loan term periods, and once their credit is repaired, they will be able to qualify for higher loan amounts and lower APRs.
Personal loan rates at banks vs. credit unions
There are many pros and cons to applying for a personal loan through a bank or with a credit union. Both have unique requirements and fees.
Traditional banks may offer more competitive interest rates on your loan, but they typically have stricter eligibility requirements. They also usually take longer to approve applications and will take longer to deposit funds than an online lender or credit union.
A credit union loan may carry the lowest rates compared to banks and online lenders and are a better option for those with fair to poor credit scores. A credit union may be more willing to consider a fair to bad credit borrower’s entire financial situation and usually approve a high-interest rate loan.
Another thing to consider with a credit union is that they typically require applicants to become members once approved. This can mean that account holders pay more fees for their application approval.
The bottom line
Overall, there is a lot to consider when deciding why you need a personal loan and what is a reasonable interest rate on that loan. Depending on your credit score, annual income, and debt-to-income ratio, you can expect to lock in specific rates based on the steady APR of personal loans.
Before signing on the dotted line, it is essential to do your research before applying and understanding all of the terms and fees that go into an APR. One great place to start your research is Entrepreneur. Check out our site for all kinds of great business content.
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