Published in: Personal Loans | Aug. 23, 2019

What Is a Good Personal Loan Interest Rate?

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What is a good interest rate on a personal loan? Find out how you can reduce the cost of borrowing.

Financial report with a calculator, pen and piggy bank.

Image source: Getty Images

When you take out a personal loan, you have to pay interest. With a range of loan options out there, you want to keep the cost of borrowing down by getting the best rate possible. This means you need to know what a good personal loan interest rate actually is.

The rate you’ll receive will vary depending on your credit score, income, amount borrowed, and loan repayment term. Obviously, if you can get a rate that is at or below the average -- which ranged from 9.37% to 10.36% in recent months, according to Experian and the Federal Reserve -- you’re getting a good personal loan interest rate. 

If you have excellent credit, you should be able to get a loan at an even lower cost. But if your credit is poor, you are unlikely to qualify for these rates and a good rate for you would be much higher. 

What is a good personal loan interest rate?

Banks, credit unions, and online lenders all offer personal loans at different rates. Some lenders offer loans at rates as low as 3.99% -- however, these rates are typically only available to borrowers with excellent credit ratings. At the other end of the scale, lenders marketing loans to borrowers with bad credit may charge 200% interest or more. 

If you have good to average credit, look for a personal loan rate that is close to or below average. Experian reports the annual percentage rate for an average personal loan was 9.37% at the end of 2018, while the New York Federal Reserve puts the average interest rate on a 24-month personal loan at 10.36% at the beginning of 2019.

If you have excellent credit, a good personal loan rate is usually below 6%, while if you have fair or poor credit, you could be looking at about 36%. 

What affects your personal loan interest rate?

One reason there is so much variation in what’s considered a good personal loan interest rate is that different borrowers have different financial profiles and different personal loans have different repayment terms. 

Your own personal situation when you apply for a loan, as well as the details of the loan you’re applying for, will all affect the interest rates you’re offered. Some of the key factors that can impact your loan rate include:

  • Your credit score. As mentioned above, people with higher credit scores should qualify for loans at better rates. If you have a credit score of 750, a personal loan with a 36% interest rate would be a very high rate for you -- but if your score is 580, this would likely be a very competitive rate for you based on your credit history. 
  • Your income and employment. If you don’t have proof of solid employment and a high enough income to convince a lender you can pay back the money you’re borrowing, you’ll only be offered loans at very high rates -- if at all. 
  • Whether the loan is a fixed or a variable rate loan. The interest rate on variable rate loans usually starts lower than that of a fixed rate loan -- but it can go up over time. If you’re looking at two different loans with the same rates but one is fixed and the other is variable, the fixed rate loan is almost always the better deal because you’ll have the certainty of knowing payments won’t change.
  • Your repayment timeline. If you borrow money over a longer period of time, there’s more risk to the lender, so interest rates are naturally higher. A loan with a shorter repayment timeline should have a lower rate than one with a longer repayment period -- otherwise, it’s not a very good rate. 
  • The amount you’re borrowing. Bigger loans sometimes present more risk to lenders, so rates could be higher. 

How can you determine if you’re being offered a good personal loan interest rate?

Comparing the personal loan rates you’re being offered with the average loan rate will give you an idea of where you stand. But given that rates can vary wildly depending on your credit profile, the best thing to do is to compare rates from at least three lenders. And ideally, you should look at a mix of different kinds of lenders to get the full picture.

By doing this comparison, you can see whether the rates are all similar or if any stand out as particularly high or particularly low. Just be sure to check all the costs and fees associated with each loan, especially if one rate seems to be too good to be true.

When comparing loan rates to see if a personal loan is offering a good rate or not, be sure you’re comparing like with like. The loans you’re comparing should have the same repayment period, and should either all be fixed rate or all be variable rate loans. 

What to do if you’re not offered a personal loan at a good interest rate

If you’re only being offered personal loans at very high rates -- well above the national average rates -- you need to consider why. 

Your priority should be to find out if there’s something in your borrower profile that is a red flag for lenders, such as a low credit score or insufficient income. If it is, you either need to correct the problem by improving your credit or earning more income -- or you need to get a cosigner to vouch for you. You can get a much better rate if the cosigner has better credentials and is willing to commit to paying back the loan if you don’t. 

If you’re a well-qualified borrower and aren’t being offered a loan at a good rate, you may simply need to shop around to see if you can find a more competitive offer. You can also consider borrowing for a shorter period of time or borrowing a bit less money so you present less of a risk. 

Always compare personal loan rates

The lower the rate you pay to borrow, the more you can save on your loan. If you’re a reasonably well qualified borrower, always be sure to compare rates from different lenders and look for rates at or below the average. That way you won’t pay more than you need to for your personal loan.

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