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. You will likely ask yourself, "What is a good interest rate for a personal loan?"
The rate you'll receive will vary depending on your credit score, income, amount borrowed, and loan repayment term. If you have excellent credit, you should be able to get an even lower personal loan interest rate. But if your credit is poor, you're unlikely to qualify for these rates and a good rate for you would be much higher.
Here's how to find out whether the loan interest rate you're offered is a good interest rate.
If you have excellent credit, a good personal loan rate is usually below 8%. If your credit score is on the low end, you'll pay more. Personal loans for fair credit can have interest rates as high as 36%.
You can find personal loans at different rates at a bank, credit union, or online lender. Some lenders offer loans at rates that are lower than 6% -- however, these low-interest personal loans are generally reserved for borrowers with high credit scores.
If you have good to average credit, look for a personal loan rate that is close to or below average. Experian put the average personal loan annual percentage rate (APR) at 9.41% in 2019, while the New York Federal Reserve puts the average personal loan interest rate at 9.34% for the third quarter of 2020 on a 24-month loan.
When looking for a good interest rate for a debt consolidation loan, an additional question to ask is "Is this a lower rate than the rate on my credit cards?" In general, personal loan interest rates are lower than credit card interest rates -- but it's always good to double-check any specific loans you're considering.
So, what is a good interest rate for a personal loan? It depends on your credit.
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:
As you can see, one reason there's so much variation in what's considered a good personal loan interest rate is that borrowers have different financial profiles and personal loans have different repayment terms.
Comparing the personal loan interest rate you're being offered with the average loan rate will give you an idea of where you stand. Since rates can vary wildly depending on your credit profile, the best thing to do is to compare rates from at least three lenders. Ideally, 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. For example, one loan might charge an origination fee or have a different loan term. The loans you're comparing should have the same repayment period, and should either all be fixed rate or all be variable rate loans.
If you're only being offered personal loans at very high rates -- 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.
What is a good interest rate for a personal loan? It's the lowest rate you can get. 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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