Personal loan rates are now lower than they have been all year, according to the Federal Reserve. That’s good news for consumers looking to use a personal loan to consolidate debt, finance home renovations, or pay for major expenses.
The average two-year personal loan interest rate fell to 9.39% in the third quarter of 2021, according to the Fed report, compared to 9.58% in Q2 and 9.46% in Q1. But just because the average personal loan interest rate remains low doesn’t mean all borrowers will qualify for a low rate.
Keep reading to learn more about how personal loan rates are determined and how you can earn a good interest rate. When you’re ready to apply for a personal loan, compare rates between personal lenders without affecting your credit score on Credible.
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How are personal loan interest rates determined?
Personal loans are generally unsecured, which means they do not require you to post any asset as collateral in case you do not repay the loan. Without collateral, lenders must use a borrower’s credit history to determine their likelihood of default.
Lenders assess your financial responsibility using your credit score and debt-to-income ratio (DTI). Borrowers with bad credit and high DTI are historically less likely to repay the loan in full, making it a riskier bet for the lender. On the other hand, borrowers with good credit and low DTI are safer investments for lenders, giving them a better chance of being approved at a lower interest rate.
In addition to your credit score, personal lenders consider a few other factors when setting interest rates: loan amount and loan term. A personal loan with a larger loan amount and a shorter repayment term may carry a much higher interest rate than a small loan spread over a longer term of monthly payments.
Also, your interest rate is only one factor in determining the total cost of a personal loan. You’ll want to look at the annual percentage rate (APR), which is the total cost of borrowing for the loan, including the interest rate and origination costs. Some personal lenders do not charge origination fees. In this case, the APR is the same as the interest rate.
You will also need to determine if a personal lender imposes prepayment penalties, which are imposed if you repay your personal loan before the loan term expires. However, many lenders don’t impose these penalties, so be sure to check the loan offer if you plan to pay off your personal loan sooner.
Browse estimated personal loan APRs and actual lender loan terms in the chart below, and visit Credible to see the personal loan rates that are right for you.
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How to lock in a low personal loan rate
While the average interest rate on a personal loan remains low, this is not the case for all borrowers. To qualify for the best interest rates on personal loans, you will need to exceed a lender’s minimum credit score requirements and prove that you are a creditworthy borrower. Here are some ways to benefit from a lower rate on a personal loan.
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Request a copy of your credit file
Your credit report is a thorough examination of your financial well-being as a borrower. It includes all debts incurred in your name, loan amounts and interest rates, and your on-time payment history. It’s important to take a close look at your credit report to see where you can improve and check for errors.
You can get a free copy of your credit report from all three credit bureaus at www.AnnualCreditReport.com.
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Work to establish your good credit score
A lower credit rating translates directly into higher interest rates on personal loans and vice versa. Borrowers with excellent credit will have the best chance of getting a personal loan with lower interest rates. If you have bad credit, work on building your score before applying for a personal loan using these strategies:
You should also sign up for a credit monitoring service to make sure identity thieves don’t open credit accounts in your name and use your credit in a negative way. You can get free credit monitoring services on Credible.
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Keep your debt-to-income ratio low
Your debt-to-income ratio (DTI) is the amount of debt you have in your name compared to your annual income. To calculate your DTI, use this formula: Total monthly debt divided by gross monthly income multiplied by 100.
You should consider keeping your DTI ratio below 35% to qualify for a number of financial products, including mortgages, private student loans, and personal loans.
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Compare the best personal loan rates between several lenders
Average personal loan rates can vary from lender to lender. For example, a credit union or online lender may offer lower personal loan rates than a traditional bank. For this reason, it’s important to compare interest rates from multiple sources to ensure you get a good rate.
Many banks and online lenders allow you to check your personal loan interest rate without impacting your credit score through a process called prequalification. This way, you can browse estimated rates and make a formal request through the lender with the best offer.
You can view personal loan prequalification offers from multiple lenders in one place on Credible. Once you have a good idea of your interest rate, use a personal loan calculator to estimate your monthly payment.
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Consider a secured loan as an alternative to a personal loan
Since personal loan rates are highly dependent on the borrower’s credit rating, consumers with fair or poor credit should consider secured loans as a borrowing alternative. There are several types of secured loans that offer cash financing:
- Secured Personal Loans. Some personal lenders offer self-secured loans to borrowers who otherwise would not qualify for a loan. In this case, you’re using your car title as collateral to get a lower rate, but if you don’t repay the loan, creditors can seize your vehicle to recover the cost of the loan.
- 401(k) Loans. Some 401(k) plans allow consumers to borrow against their account balance. Since you’re borrowing from your own retirement savings, you don’t need to submit to a credit check. Interest rates are generally low, making them a good option for low-cost borrowing. But you could be subject to early withdrawal fees and risk overborrowing your retirement nest egg.
- Mortgage refinancing cashed in. Mortgage rates are close to historic lows, according to Freddie Mac, making it a good time to refinance your mortgage at a lower rate. And with your home equity near record highs, you might be able to borrow a mortgage that’s more than you owe on your current home loan and pocket the difference in cash. As this is a secured loan, you risk losing your home if you cannot pay off your new mortgage.
Secured loans can be a good borrowing option for borrowers who might not otherwise qualify for an unsecured loan, but they come with the added risk of losing any assets you have pledged. Contact a knowledgeable Credible loan officer to learn more about your secured fixed rate loan options, such as mortgage refinance with drawdown.
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