What’s a Good Interest Rate for a Personal Loan?
by Elizabeth Aldrich | June 25, 2019
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Just like going into the grocery store with a shopping list ensures you'll come out with what you need, going into a personal loan knowing what to look for will help you avoid paying hidden fees and sky-high interest rates. Read on to find out more about low-interest personal loans and how to secure one.
How interest rates work on personal loans
Put simply, the interest rate on a personal loan is the cost of borrowing money. Interest accumulates as a percentage of your overall loan balance. You make payments on the interest each month with your monthly payment, and as your remaining balance decreases, your interest charges should as well. Interest rates on personal loans are usually fixed, meaning they stay the same for the entire life of the loan.
How interest rates impact the cost of a personal loan
When shopping around for a loan, you'll usually see the interest rate expressed as an annual percentage with any other fees included, otherwise known as the APR. The table below shows you how much you end up spending over the life of a $10,000 personal loan depending on the APR.
| Loan | Loan amount | Loan term | APR | Monthly payments | Total amount paid | Total interest paid |
| Loan A | $10,000 | 5 years | 7% | $198 | $11,881 | $1,881 |
| Loan B | $10,000 | 5 years | 13% | $228 | $13,652 | $3,652 |
| Loan C | $10,000 | 5 years | 18% | $254 | $15,236 | $5,236 |
Source: Author
As you can see, the interest rate you pay is immensely important. If you end up with Loan C, the 18% APR increases the cost of the loan by over 50%.
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Average interest rate on personal loans
The interest rate on a personal loan is largely determined by your credit score, although your income and employment can also be used to determine your interest rate. Average interest rates on personal loans for consumers with fair or good credit tend to range from 6% to 36%, according to credit reporting company Experian, with the most creditworthy borrowers qualifying for rates on the lower end of that range.
Good interest rate on personal loans
If you take a look at the best personal loans for 2019, you'll see that most lenders offer rates within the 6% to 36% range. A good interest rate on a personal loan is anything within the lower end of that range. Lenders that cater to consumers with good credit -- such as Barclays, SoFi, Marcus, and Freedom Plus -- will typically offer the best rates on personal loans.
Credit score requirements for personal loans
The primary factor in determining your interest rate is your credit score. The higher your credit score, the lower the interest rate you'll qualify for. But exactly how high does your credit score have to be?
Anyone with excellent credit, which is considered to be a FICO® Score of 800 or above, will have no trouble qualifying for the lowest interest rate available at any given lender. In fact, as long as your FICO® Score is at least 740, you'll probably be able to get the best deals on personal loans.
People with credit scores between 700 and 740 will still qualify for the best personal loans, but may receive a slightly higher interest rate than folks with excellent credit. If your credit score is in the 600s, there are still online lenders who will give you a personal loan, but you're likely going to get offers with mediocre interest rates at best. Once your score is in the low 600s or below 600, you'll find it hard to get approved for a personal loan from any lender aside from those with extremely high, predatory interest rates.
How to improve your credit score
If you don't have good or excellent credit, improving your credit score before you apply will get you a good interest rate on a personal loan. Here are some tips to up your score quickly.
Pull your credit report -- It's hard to improve your credit score if you don't know what's bringing it down. The first step is to pull your credit report from the three major credit bureaus -- Equifax, Experian, and TransUnion. You can do this for free once each year at AnnualCreditReport.com, and it won't hurt your credit.
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Pay off existing debt -- One of the best ways to increase your credit score (and save money) is to pay off your existing debt. Payment history is the most important factor in determining your credit score, so making a series of on-time payments gives you a good boost. On top of that, paying off credit card debt will help improve your credit utilization, the second most important factor in your credit score, by decreasing your debt-to-credit ratio.
Get a credit card and pay it off monthly -- If your credit is sub-par, it's often because you either don't have a robust payment history, or you have a negative payment history. Both of these problems can be improved by building up a positive payment history. If you aren't currently in debt, consider opening a credit card, using it for a few necessary purchases each month, and paying it off in full when the bill comes to avoid interest fees.
Wait six months after your most recent inquiry -- Although it's not as important as payment history and credit utilization, recent inquiries on your credit report do impact your credit score. An inquiry occurs when you apply for credit, (be it a loan, financing, or a credit card), and the lender performs a hard pull on your credit report. While one or two are no big deal, having more than a few in the past couple years can drag down your score.
Luckily, inquiries fall off your report entirely after two years, and they don't really impact your credit score after one year. If you have a lot of recent inquiries, consider waiting until they've hit the one year mark to apply for a loan, as your score might go up.
Dispute any errors on your credit report -- It's possible that the mark bringing down your credit score doesn't even belong to you. If you notice any errors on your credit report, or negative marks you don't recognize, report them immediately to all three credit bureaus. Here's what to do if you find errors on your credit report.
Wait for negative marks to fall off your credit report -- Finally, if you have a negative account on your credit report that's keeping your score down, you can also simply wait for the account to disappear from your credit report. It takes seven years for most negative information to fall off of your credit report, although some bankruptcies stay on your credit report for 10 years.
Banks with the lowest interest rates on personal loans
While your credit score will determine which loans you qualify for, some places offer better rates on personal loans than others.
Traditional banks
When most people think about applying for a loan, they think about traditional banks. While many traditional banks offer good low-interest personal loans, they can be tricky to qualify for. Unless you have excellent credit and steady income you might find it difficult to get approved for a personal loan from a traditional bank.
Credit unions
Credit unions are not-for-profit, member-owned financial institutions that pass off profits to their members in the form of lower interest rates and higher returns. In many cases, credit unions offer even lower interest rates on personal loans than traditional banks. You'll still need good credit in order to qualify for most of these loans, and you'll also need to be a credit union member in order to apply. Some credit unions make it easy to join while others require that you be affiliated with certain organizations or live in a certain area.
Online lenders
Online banks and lenders are becoming more popular, in large part due to their flexibility and attractive rates. By avoiding the overhead costs of operating brick-and-mortar locations, many online lenders are able to offer interest rates that can compete with those offered by traditional banks. On top of that, they tend to be a little less strict when it comes to credit score requirements, and some online lenders are willing to look at factors beyond your credit score. The approval and funding process tends to be faster with online lenders as well.
From big national banks to online lenders and credit unions, know that you have a variety of options, and be sure to shop around before making a decision. By spending a little extra time seeking out the best interest rate on a personal loan, you could save hundreds, sometimes thousands, of dollars on interest fees.
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About the Author
Elizabeth is a writer specializing in credit cards, debt repayment, and small business. Her work has also appeared on MSN Money, Yahoo! Finance, and Business Insider.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
