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Compared to credit cards, personal loans generally have lower interest rates. The average credit card interest rate in the first quarter of 2022 was 16.17%, compared to 9.41% for a 24-month personal loan, according to Federal Reserve Data.
Having a great credit score is the best way to get the lowest interest rates available. Here’s how to lock in a good interest rate on a personal loan.
Visit Credible for see interest rates for your prequalified personal loan from various lenders, all in one place.
Factors That Affect Your Personal Loan Interest Rate
A number of factors can affect the interest rate you get on a personal loan, including:
- Credit score — Your credit score is a three-digit number that helps lenders assess risk. It’s based on your payment history, credit mix, account length, and more. Credit scores generally range from 300 to 850, with a higher score being better.
- Debt-to-income ratio — The debt-to-income ratio (DTI) refers to all your monthly debt payments divided by your gross monthly income. A good rule of thumb is to keep your DTI ratio at 43% or less.
- Work history and income — Most lenders look at your last 24 months of employment to determine if you can afford to repay your loan. They hope to see stable employment or a reliable source of income.
- Duration and amount of the loan — Longer-term loans and larger loans usually carry higher rates than smaller, shorter-term loans. Indeed, longer and larger loans force lenders to take on more risk.
- Guarantee – Although personal loans are generally unsecured, you may be able to obtain a secured personal loan by providing collateral (something valuable that you own). Since lenders can seize collateral if you don’t make your payments, secured personal loans tend to have lower interest rates.
5 ways to improve your credit score
If you’re unhappy with your credit score, these strategies can help improve it:
- Review your credit reports. Visit AnnualCreditReport.com to get free copies of your credit reports from the three major credit bureaus: Equifax, Experian and TransUnion. Review each report carefully and dispute any errors you find with the appropriate office.
- Pay your bills on time. Payment history has the biggest effect on your credit score. That’s why it’s important to pay your mortgage, credit cards, car loans, student loans and other bills on time, every time.
- Pay off the debt. Your credit utilization rate — or the amount of debt you owe relative to your available credit — will also affect your credit score. To reduce your credit usage and improve your score, do your best to pay down your debt.
- Do not close old accounts. You might be tempted to close accounts you no longer use. Since the credit bureaus like to see an established credit history, you should leave your old accounts open.
- Avoid opening new accounts. Each time you apply for a credit card or loan, the lender may do a thorough investigation, which may temporarily lower your credit score. For this reason, only apply for new credit when you absolutely need it.
To ensure you get the lowest interest rate on a personal loan, follow these steps:
- Improve your credit score. The higher your score, the easier it will be for you to strengthen your loan application and get a good interest rate.
- Shop around and compare lenders. Banks, credit unions and online lenders offer personal loans. Not all personal loans are created equal, so do your research and explore all of the options available to you. Compare the interest rates, terms and fees of each loan you find to find the one that best suits your needs.
- Apply with a co-signer. A co-signer with good credit can help you get an interest rate you wouldn’t get otherwise qualify for all alone. If your lender accepts co-signers, it’s worth finding one. Just make sure your co-signer understands that they will be responsible for your payments if you default.
If you’re ready to see what interest rates you might qualify for, visit Credible for quick and easy compare personal loan rates.