Personal Loan Rates Have Dropped More Than 10%. Here Are 4 Steps to Locking in the Best Rate

Need a loan? Now might be a good time to apply.

If you've been thinking about getting a personal loan, now might be a good time to apply. From Aug. 29 to Sept. 3, the average interest rates for three-year personal loans fell 10.04%, while the rate for a five-year loan decreased 4.56%. When you take out a personal loan, you get a lump sum of money that can then be used for whatever you want. Personal loans can be a good way to fund credit card debt consolidation, home repairs/renovations, or unexpected expenses if you're lacking the cash to cover them. So what steps should you take if you want to get the best personal loan rate possible?

1. Work on your credit score

Paying attention to and improving your credit score is personal finance 101. As someone who is spending this year improving her overall financial picture, including credit score, I can tell you it's not as daunting as it may seem. Getting and keeping a good credit score comes down to a few actions anyone can take:

• Check your credit score regularly. You can drive yourself crazy with the normal fluctuations of a credit score, so it's not necessary to check every day or every week, but it's a great idea to use a consumer credit-monitoring service to check up on your score, especially in advance of using credit. Maybe you're planning to apply for a new credit card, or buy a house, or in this case, apply for a personal loan. Your credit score places you in a number range rated from poor to excellent, and this will determine the personal loan interest rate you qualify for.
• Check your credit report at least annually. It's also a good idea to review your credit report (and you can access your credit report from the three major credit bureaus for free through AnnualCreditReport.com) to check for errors, like old accounts that you paid off but still show as open or delinquent on your report. If you find errors, you can file a dispute with the credit bureau that has it on file.
• Pay your bills in full and on time. Paying your bills on time makes up the largest percentage of your FICO score, at 35%. Personally, I've found it helpful to write out a full months' worth of bills at a time on a wall calendar, so I can cross off bills as I pay them. There are a lot of techniques to keep on top of your bills and your budget, so see what works for you.
• Keep your credit utilization ratio low. Your credit utilization ratio is the percentage of credit you have versus how much you use. For example, if you have a credit card with a $5,000 limit, but you're carrying a $2,000 balance on it, your ratio is 40%, as you're using 40% of your available credit. It's generally recommended that you keep this number under 30%, so if you're planning to apply for a personal loan in the near future, pay off some existing debt to bring your ratio down.

2. Ask someone else to apply with you and cosign the loan

If you've made some improvements to your credit score, but it's still not high enough to qualify you for the best loan rates on your own, you could ask someone to apply with you. This could be a spouse or a family member with better credit. The other person's credit and income will be considered along with yours, thereby enabling you to get a better interest rate. Cosigning a loan for someone else is a big risk, however, so don't be offended if the person you ask says no. They're putting their finances on the line if they cosign. And not all lenders will offer loans with a cosigner, so do your research.

3. Consider a secured loan

If your credit needs some help, you may be able to get a more favorable interest rate on a personal loan by applying for a secured loan. Secured loans are backed by collateral that the lender can take and sell if you don't pay the loan, to recoup its losses. So if you need money and can offer up your car as collateral, you may be able to get an affordable loan. Just make sure you keep up on those payments, as you don't want to lose your car or other collateral.

4. Shop around

The final step to getting the best personal loan interest rate possible is to shop around with a bunch of lenders. A good place to start is to target the best lenders for your tier of credit score, and see what they're offering for interest rates. Many lenders have easy-to-use online prequalification tools that will be able to give you a rate without hurting your credit score (when you're ready to apply for real, the lender will do a hard credit inquiry, which impacts your credit score). Sometimes lenders offer special promotions and discounts you may qualify for.

If you need money, a personal loan can be a great way to borrow. But do your best to improve your credit score, consider all your options for loan types, and shop around for the best deal before you borrow money.