Average personal loan interest rates stay low, so how can you get a good interest rate?
Personal loans offer lump-sum financing that is paid directly into your bank account and repaid in monthly installments over a set period of time. Your interest rates are fixed, which means they don’t go up unexpectedly. This is in contrast to credit cards, which can have higher, variable interest rates.
These loans are usually unsecured, meaning you don’t need to deposit an asset as collateral. Because of this, personal lenders rely on your financial history – including your creditworthiness and debt-to-income ratio – to determine eligibility and set interest rates.
Personal loan interest rates are currently relatively low, so this is a good time to pay off debts or finance home renovations. Read on to learn more about how to get a great interest rate on a personal loan and when you are ready to start your loan purchase, visit Credible.
WHAT IS A GOOD INTEREST ON A PERSONAL LOAN?
Personal loan rates are at their lowest level in years
Personal loan interest rates typically range from 4% to 36%, with an average of 9.46% for a 24-month loan, according to the Federal Reserve. In contrast, the average interest rate on a credit card account that earns interest is 15.91%. Interest rates have risen slightly in recent years before falling in 2020 and the first quarter of 2021. See how they have changed in the graphic below:
How to Get the Best Personal Loan Interest Rate
Personal loan interest rates vary widely and depend on a number of factors, including your creditworthiness and debt-to-income ratio, and loan size and length. Here are some steps you can take to get the best possible personal loan deal:
- Check and monitor your creditworthiness
- Lower your debt-to-income ratio
- Get prequalified by multiple lenders
- Keep an eye out for other personal loan fees
WHEN TO USE A PERSONAL LOAN ON A CREDIT CARD
Check and monitor your creditworthiness
A good credit score is usually 670 or higher as defined by the FICO scoring model. If your credit score is 669 or less, you should consider building your credit before applying for a personal loan to ensure that you are getting a competitive interest rate.
Get a free copy of your credit reports from all three credit reporting agencies by visiting www.AnnualCreditReport.com. Here are a few ways to top up your credit:
- Pay an amount of credit card debt: This can have an immediate positive impact on your credit score by lowering your credit exposure.
- Open a secured credit card: This can help you build up credit while using a small amount of savings as collateral.
- Check your credit reports for accuracy: If an error occurs, such as an inaccurate missed or late payment, you can appeal it to improve your credit score.
You can also get credit monitoring services for free – with no impact on your creditworthiness – through Credible.
Lower your debt-to-income ratio
Your debt-to-income ratio (DTI) is the amount of debt, including student loans and car loans, that you have taken out in relation to your income. Your DTI rate should be below 35% for the lowest personal loan rates.
You can lower your DTI rate by either increasing your income or paying off some of your debt. You can use cash wins like a business check or a tax refund to lower your DTI with little effort.
SOME OF THE BEST PLACES TO GET A PERSONAL LOAN
Get prequalified by multiple lenders
Personal loan prequalification allows you to check your creditworthiness and potential interest rate with a soft credit pull that doesn’t affect your creditworthiness. That way, you can look for the lowest interest rate for your individual situation.
Not all lenders offer prequalification, but since there is no cost or impact on your credit score, it’s still a good idea to check your potential interest rates with the lenders who do.
You can pre-qualify and compare rates with multiple lenders at the same time by completing a single form on Credible’s online credit marketplace.
16 OF THE BEST PERSONAL LOANS IN 2021
Keep an eye out for other personal loan fees
Your interest rate isn’t the only measure of how much your personal loan is costing. Also, consider any other costs, such as a lending fee or an early repayment penalty.
The personal loan fees are a percentage of the total cost of the loan and can be deducted from or added to the total balance. They are typically between 1% and 8%, but some personal loan lenders do not charge a commitment fee.
Prepayment penalties are levied if you repay the loan before the term expires. However, prepayment penalties for personal loans are becoming increasingly rare. It’s still good to read the fine print to check for early repayment penalties if you are planning on paying off your loan early.
The annual percentage rate (APR) of your personal loan includes the interest rate plus any fees, so it is a more accurate measure of the cost of a loan than the interest rate alone.
Use Credible’s loan calculator to see how your monthly payments and total loan cost fluctuate with interest rates. When you are there, look for the lowest interest rates for your situation.
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