Personal loan rates are lower now than they’ve been all year, according to the Federal Reserve. This is good news for consumers who want to use a personal loan to consolidate debt, finance home renovations, or pay for major expenses.
The average interest rate on a two-year personal loan fell to 9.39% in the third quarter of 2021, according to the Fed report, from 9.58% in the second quarter and 9.46% in the first quarter. But just because the average interest rate on personal loans remains low does not mean all borrowers will qualify for a low rate.
Keep reading to learn more about how personal loan rates are determined and how you can qualify for a good interest rate. When you are ready to apply for a personal loan, compare the rates of personal lenders without affecting your credit score on Credible.
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How are personal loan interest rates determined?
Personal loans are generally unsecured, which means that they don’t require you to put up an asset as collateral in case you don’t repay the loan. Without collateral, lenders should use a borrower’s credit history to determine their likelihood of default.
Lenders judge your financial responsibility based on your credit rating and debt-to-income ratio (DTI). Borrowers with bad credit and a high DTI are historically less likely to repay the loan in full, making it a riskier bet for the lender. On the other hand, borrowers with good credit and low DTI are safer investments for lenders, giving them a better chance of getting approved at a lower interest rate.
In addition to your credit rating, personal lenders consider a few other factors when setting interest rates: the amount and length of the loan. A personal loan with a larger loan amount and a shorter repayment term can carry a much higher interest rate than a small loan that is spread over a longer term of monthly payments.
In addition, your interest rate is only one factor in calculating the total cost of a personal loan. You’ll want to look at the Annual Percentage Rate (APR), which is the total cost of borrowing on the loan., including the interest rate and origination fees. Some personal lenders do not charge a set-up fee. In this case, the APR is the same as the interest rate.
You will also need to determine if a personal lender charges prepayment penalties, which are assessed if you pay off your personal loan before the loan term expires. However, many lenders do not charge these penalties, so be sure to check out the loan offer if you plan to prepay your personal loan.
Browse estimated personal loan APRs and loan terms from real lenders in the table below, and visit Credible to see personal loan rates to suit your needs.
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How to lock in a low personal loan rate
While the average interest rate on a personal loan remains low, this is not the case for all borrowers. To qualify for the best interest rates on personal loans, you will need to exceed a lender’s minimum credit score requirements and prove that you are a creditworthy borrower. Here are some ways to get a lower rate on a personal loan.
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Request a copy of your credit report
Your credit report is a thorough examination of your financial well-being as a borrower. It includes all debts incurred in your name, your loan amounts and interest rates, and your on-time payment history. It’s important to take a close look at your credit report to see where you can improve and check for errors.
You can get a free copy of your credit report from all three credit bureaus at www.AnnualCreditReport.com.
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Work on building your good credit score
A lower credit score directly translates into higher interest rates on personal loans and vice versa. Borrowers with excellent credit will have the best chance of securing a personal loan with lower interest rates. If you have bad credit, work on building your score before applying for a personal loan using these strategies:
You should also sign up for a credit monitoring service to make sure that identity thieves are not opening credit accounts in your name and using your credit in a negative way. You can get free credit monitoring services on Credible.
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Keep your debt-to-income ratio low
Your Debt-to-Income Ratio (DTI) is the amount of debt you have in your name compared to your annual income. To calculate your DTI, use this formula: Total monthly debt divided by gross monthly income multiplied by 100.
You should consider keeping your DTI ratio below 35% to qualify for a number of financial products, including mortgages, private student loans, and personal loans.
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Compare the best personal loan rates from several lenders
Average personal loan rates can vary from one lender to another. For example, a credit union or online lender may offer lower personal loan rates than a traditional bank. For this reason, it is important to compare interest rates from several sources to make sure you are getting a good rate.
Many banks and online lenders allow you to check the interest rate on your personal loan without impacting your credit score through a process called prequalification. This way, you can browse the estimated rates and officially apply to the lender with the best deal.
You can view personal loan prequalification offers from multiple lenders in one place on Credible. Once you have a good idea of your interest rate, use a personal loan calculator to estimate your monthly payment.
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Consider a secured loan as an alternative to a personal loan
Since personal loan rates are highly dependent on a borrower’s credit rating, consumers with average or poor credit should consider secured loans as a borrowing alternative. There are several types of secured loans that offer cash financing:
- Guaranteed personal loans. Some personal lenders will offer self-secured loans to borrowers who would not otherwise qualify for a loan. In this case, you are using your car title as collateral to get a lower rate, but if you don’t pay off the loan, creditors can seize your vehicle to recover the cost of the loan.
- 401 (k) loans. Some 401 (k) plans allow consumers to borrow against their account balance. Since you’re borrowing from your own retirement savings, you don’t need to go through a credit check. Interest rates are generally low, making it a good option for low cost borrowing. But you may be subject to early withdrawal fees and you may overborrow your retirement nest egg.
- Mortgage refinancing in cash. Mortgage rates are near their historic lows, according to Freddie Mac, which makes it a good time to refinance your mortgage at a lower rate. And with your home equity near record highs, you may be able to borrow a larger mortgage than you owe on your current home loan and pocket the difference in cash. Since this is a secured loan, you risk losing your home if you can’t pay off your new mortgage.
Secured loans can be a good borrowing option for borrowers who otherwise would not qualify for an unsecured loan, but they carry the additional risk of losing the assets that you have put up as collateral. Contact a knowledgeable Credible loan officer to learn more about your fixed rate secured loan options, such as mortgage refinance with withdrawal.
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