4 Factors That Affect Your Personal Loan Interest Rate

by Christy Bieber | Updated July 21, 2021 - First published on June 14, 2021

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A calculator that says interest sitting on top of U.S. currency.

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A surprising number of things can affect your rate.

When you apply for a personal loan, you'll find out if you qualify to borrow and what rate lenders will charge you.

Being approved to borrow is obviously important, but the rate you're offered matters just as much as loan approval. That's because your interest rate determines the cost of your loan. If a lender will give you a loan but only at a very high rate, it may not make sense to move forward.

Since your interest rate determines your loan costs, it's helpful to know what lenders consider when they decide what interest rate to offer you. There are four key factors that affect your personal loan rate, many of which you can control if you want to qualify to borrow at the most affordable rate possible. Here's what they are.

1. Credit score

Your credit score is one of the single most important factors that lenders look at. It's a three-digit score on a scale of 300 to 850, with scores above 670 generally classified as good or excellent credit.

If you have a very low credit score, you will probably be denied a loan. But if your score is poor or fair, it's possible lenders will give you a loan but at a very high rate. If that's the case, you may want to think about trying to build credit fast before applying for a loan or applying with a cosigner who has a higher credit score so your interest costs are more affordable.

A cosigner would have to agree to share legal responsibility for payment, so your lender could try to collect from them if you don't pay. It's a big responsibility to be a cosigner, but lenders will consider their credentials too, so you can lower your rate if someone with good credit is willing to vouch for you.

If you need help, our guide on how to rebuild your credit has tips on how to improve your credit score.

2. Amount borrowed

How much personal loan you want also matters. That's because lenders actually take into account your desired loan amount when setting your interest rate as well. There's a simple reason for that: The more money you ask for, the bigger the risk the lender takes by giving it to you.

Larger loans are riskier for a couple reasons. First, if you don't pay, the lender is out more money. Second, when you're taking on a bigger financial obligation, there's a greater chance you won't be able to meet it.

If there's a specific amount you need to borrow to accomplish your goal, there's not much you can do about the fact that you may have to pay a higher rate due to your large loan balance. But you should aim to borrow as little as you can to meet your objectives.

3. Repayment term

Most lenders offer you a choice of how long you want to take to pay your loan. For example, you might be able to decide between a three-year and a five-year payoff time. If you opt for the shorter payment time, chances are good you'll be offered a lower interest rate than if you choose a loan with a longer payoff period.

This happens for the same reason that you pay higher interest to borrow more. Lenders think it's riskier to give you a loan over a longer time rather than a shorter one. That makes sense, since the more time you take to pay your loan in full, the more time there is for something to go wrong that interferes with your ability to pay.

Choosing the shortest repayment time possible can actually help you save on interest both by helping you score a reduced rate and by ensuring you aren't paying interest for as long of a time. Of course, the big downside is that each monthly payment grows higher when you shorten your payoff time -- so don't pick such a short loan term that there's a risk you won't be able to afford payments.

Check out our guide on the pros and cons of longer repayment terms to help you decide how long you want to spend paying off your personal loan.

4. Income

Your income can affect the interest rate the lender charges you as well. Specifically, lenders look at income relative to debt.

If you have a high income and don't have many other obligations, you may be offered a lower interest rate because there's less of a chance you won't be able to pay back your loan. Again, lenders are setting your rate based on perceived risk.

On the other hand, if your income is pretty low and your payments might be a struggle to make -- especially if you've already got a lot of debt -- then you would probably be offered a loan only at a high rate if you were offered one at all.

While you can't necessarily do a lot to control your income, you should try to avoid changing jobs if you know you'll apply for a personal loan soon. That's because having a longer income history shows more stability and is preferred by most lenders.

By trying to keep your source of income steady, borrowing the least amount possible, choosing the shortest loan term you can afford, and aiming to improve your credit before applying, you should be able to qualify for a personal loan with a good interest rate -- or better.

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