How to Get a Good Personal Loan Interest Rate
What’s the secret to getting the best (lowest) possible interest rate on a personal loan? Since rates vary widely by lender, it’s important to know what affects your interest rate and APR, and to be prepared to shop around and compare what different lenders offer you.
While the interest rate is the percentage of the outstanding balance you’ll pay to borrow the funds, your annual percentage rate (APR) represents the total cost of borrowing, and includes the interest rate you receive plus any lender fees. Understanding interest rate and APR can help you snag the lowest rate possible, and quite possibly save you thousands over the life of your loan. For example:
Loan A: A $10,000 personal loan paid over 24 months at a 13.9% APR costs $1,520 in interest and fees.
Loan B: A $10,000 personal loan paid over 24 months at a 27.2% APR costs $3,080 in interest and fees.
Of course, your credit score, income level, and overall debt also play a part in what interest rates lenders offer. Thankfully, whether you need a loan now or six months from now, there’s a lot you can do to secure the lowest rates for personal loans.
What's the Average Interest Rate on a Personal Loan?
Most personal loan interest rates range from 6% to 36% and up, while nationally, the average personal loan interest rate is 9.41%, according to Experian. Personal loans tend to run lower than average credit card interest rates (20.24%) and higher than secured loans like those for a home or auto.
Banks and credit unions offer personal loans, at competitive rates. However, you may find lower rates through marketplace or online lenders specializing in personal loans.
What Affects Your Interest Rate?
While lenders try to remain competitive by offering interest rates on personal loans within the same range, there are several individual factors that decide what interest rate you’ll receive.
Loan and credit history
When you apply for a personal loan, lenders look at your credit history to see how well you’ve managed past loans and other financial obligations. If you’ve paid your loans on time in the past and are not currently carrying a lot of debt, you’ll likely qualify for a lower interest rate. On the other hand, if you’ve had trouble keeping up with your monthly payments, expect lenders to offer higher rates.
Creditworthiness is a major factor in interest rates. Although ranges vary depending on the credit scoring model, typically, credit scores above 740 are considered very good to excellent and will often receive the best interest rates on personal loans. Scores between 640 and 739 are considered good credit and may receive average to above average interest rates.
If your score falls below 700, you may still be approved for a personal loan, but your rates likely will be higher, which is why it pays to shop several lenders carefully to make sure you’re getting the best rates and terms available. Make sure you’re getting a fair deal before you sign.
Your debt-to-income ratio, or the sum of your debts divided by your income, factor into both what loan amount you can qualify for and your interest rate. Lenders want to see that you can comfortably afford to meet the monthly payments on your loan after you meet all other debt obligations. A DTI below 40% is ideal. Anything above this can signal a lender that you might not be unable to repay your loan.
Rates for personal loans vary greatly, depending on which lender you talk to. To find the best deal, compare loans with a variety of financial institutions, from your local brick-and-mortar bank or credit union, to online lenders and marketplaces. Regardless of where you look, always check your rate using the pre-qualification process to compare rates across multiple lenders. And remember that prequalifying usually won’t impact your credit score as it’s typically done with a soft credit pull versus a hard pull.
How to Qualify for a Better Interest Rate
Whether you want to apply for a personal loan today or several months from now, you can take certain steps to make sure you’re getting the best interest rates on personal loans.
1. Apply with a cosigner or co-borrower
If you’re working to improve your credit or still building up a credit history, you may find it difficult to qualify for a personal loan, or you may be offered a loan at a higher interest rate than you’d like. Asking a parent, family member, or trusted friend to co-sign the loan with you can help you qualify with better terms. A cosigner essentially acts as a backer on your loan. They won’t have access to the funds, but they do agree to make payments or pay the loan off in full if you default. To get the best interest rate, look for a cosigner with a high credit score, low debt, and a good income history.
2. Generate more income
The more expenses you have, the less income you have each month to comfortably afford to repay a personal loan—making you a bigger risk to a lender. You may be able to offset your expenses, or DTI, by boosting your income. If you’re comfortable with it, now might be a good time to ask for a raise — or a good excuse to go after that promotion you’ve been thinking about. If you have the time, you might also consider taking on a side gig to boost your monthly earnings.
3. Cut your expenses
In addition to debts, lenders also consider your expenses when deciding if you can afford a loan. Before you apply for a personal loan, take a look at your budget. While you may not be able to move to a cheaper apartment, you might be able to cut down on other expenses to lower your overall monthly costs and free up more room in your income.
4. Wait for a boost to your credit score
If you’re on the edge of entering a higher credit score bracket, you might want to wait to apply for a personal loan until your credit score improves. Say, for example, your credit score is currently a 690, but you’ve been paying your bills on time and haven’t taken on new debt. A few more on-time payments could boost your credit score by several points, making you eligible for better personal loan interest rate.
5. Pay off debt
Paying down debt is one of the fastest ways you can improve your DTI and boost your credit score. If you can afford it, pay down high-interest credit card debt. Not only will you save money on interest in the long run and improve your DTI, you’ll lower your debt utilization ratios which will provide a quick boost to your credit score. If you can’t afford to repay debts now, consider a debt consolidation loan. A debt consolidation loan consolidates all of your debts under one loan, freeing up your utilization ratio and boosting your score. Having a debt consolidation loan now does not prevent you from getting a personal loan in the future.
6. Choose a shorter loan term
If you can afford a higher monthly payment, opting for a shorter loan term on your personal loan will most likely net you a better interest rate. Some lenders tend to view shorter repayment periods, say 1- to 2-years compared to 5- to 6-years, as less of a risk on their return on investment and may offer a better deal.
7. Apply for a smaller loan amount
Applying for a lower loan amount than what you actually need can often help you land a better interest rate (and lower overall costs in the long run). This strategy can also help you qualify for a loan you wouldn’t receive otherwise. So, if you have a lot of debt to consolidate, instead of tacking it with a single personal loan all in one go, depending on your DTI, consider taking out a couple of smaller personal loans (at a lower rate) and paying down that debt using multiple loans over time. This way you minimize the risk of being denied outright, or borrowing at a higher than expected rate.
A good rule of thumb is, if your DTI is safely below 30%, go ahead and ask for the full amount you need (you just might get it, and you won't know unless you try). However, if your DTI is hovering near or above 40%, apply for less. You may not only get approved, but you may end up with a lower rate than if you had applied for a larger loan amount.
Frequently Asked Questions About Personal Loan Interest Rates
Finding the best interest rates on personal loans is a big deal. Check out the answers to these common questions.
What's the difference between APR and interest rate?
Interest rate is the percentage of the total outstanding loan that you will pay to the lender, while the annual percentage rate, or APR, is the total cost of borrowing, including the interest rate plus any fees charged by the lender.
What's the maximum amount for a personal loan?
Maximum loan amounts vary by lender. Online lenders or marketplaces, like LendingClub, typically offer $40,000 to $50,000 personal loan limits, while credit unions or smaller local banks may offer less.
Should I shop around before choosing a personal loan?
Yes. Compare personal loan offers across several lenders to ensure you’re getting the best rates and terms—and paying the least overall to borrow the funds you need. When evaluating loan offers, comparing APRs is a one way to quickly find out if you’re getting a good deal overall. Learn more about how to know if you've got a good loan offer.
The Bottom Line
While a personal loan can help you get the funds you need to consolidate debt, cover unexpected medical expenses, or pay for home improvements to increase the value or safety of your home, you don’t want to end up borrowing (and paying for) more than you need or can afford. See what steps you can take to improve your chances of qualifying for the best deal, and don’t forget to shop around—personal loan rates vary widely by lender.