Average personal loan interest rates remain low, so how do you get a good rate?

Find out the average personal loan rates, as well as eligibility requirements, mortgage lenders, loan amounts and monthly payments. (iStock)

Personal loans offer lump sum financing that is paid directly into your bank account and repaid in monthly installments over a specified period of months. Their interest rates are fixed, which means that they will not increase unexpectedly. This contrasts with credit cards, which can have higher variable interest rates.

These loans are usually unsecured, which means they don’t require you to put up any asset as collateral. For this reason, personal lenders rely on your financial history — including your credit score and debt-to-equity ratio — to determine eligibility and set interest rates.

Personal loan interest rates are relatively low right now, making it a good time to pay off debt or finance home renovations. Read on to learn more about getting a good interest rate on a personal loan, and visit Credible when you’re ready to start shopping for loans.

WHAT IS A GOOD INTEREST RATE ON A PERSONAL LOAN?

Personal loan rates are at their lowest in years

Personal loan interest rates typically range between 4% and 36%, with an average of 9.46% for a 24 month loan, according to the Federal Reserve. In contrast, the average interest rate on an interest-rated credit card account is 15.91%. Over the past few years, interest rates rose slightly before falling in 2020 and the first quarter of 2021. See how they fluctuated in the chart below:

How to get the best interest rate on a personal loan

Personal loan interest rates vary widely depending on a number of factors, including your credit score and debt-to-equity ratio, as well as the amount and term of the loan. Here are some steps you can take to get the best possible deal on a personal loan:

  • Check and monitor your credit score
  • Reduce your debt to income ratio
  • Get prequalified with multiple lenders
  • Keep an eye on other personal loan fees

WHEN TO USE A PERSONAL LOAN ON A CREDIT CARD

Check and monitor your credit score

A good credit score is usually 670 or higher as defined by the FICO scoring model. If your credit score is 669 or lower, you should consider working on building your credit before applying for a personal loan to ensure you get a competitive interest rate.

Obtain a free copy of your credit reports from all three credit bureaus by visiting www.AnnualCreditReport.com. Here are some ways to increase your credit:

  • Paying off credit card debt: This can have an immediate positive effect on your credit score by reducing your rate of credit utilization.
  • Open a secure credit card: It can help you build credit while using a small amount of savings as collateral.
  • Check the accuracy of your credit reports: If there’s a mistake, like an inaccurate missed or late payment, you can dispute it to boost your credit score.

You can also get free credit monitoring services — with no effect on your credit score — through Credible.

Reduce your debt to income ratio

Your debt-to-income ratio (DTI) is the amount of debt, including student loans and car loans for example, that you have borrowed compared to your income. Your DTI ratio must be below 35% to qualify for the lowest personal loan rates.

You can lower your DTI ratio by increasing your income or paying off some of your debt. You can use cash gains, like a stimulus check or tax refund, to lower your DTI with little effort.

SOME OF THE BEST PLACES TO GET A PERSONAL LOAN

Get prequalified with multiple lenders

Personal loan prequalification allows you to verify your loan eligibility and potential interest rate with a soft credit application, which will not affect your credit score. This way you can shop around for the lowest possible interest rate for your unique situation.

Not all lenders offer prequalification, but since there’s no cost or effect on your credit score, it’s always a good idea to check your potential rates with lenders who do.

You can be prequalified with multiple lenders at once and compare rates by filling out a single form on Credible’s online loan marketplace.

16 OF THE BEST PERSONAL LOANS IN 2021

Keep an eye on other personal loan fees

Your interest rate is not the only measure of the cost of your personal loan. You should also factor in any other costs, such as loan origination fees or prepayment penalties.

The personal loan origination fee is a percentage of the total cost of the loan and can be taken from the total balance or added on top. They typically range from 1% to 8%, but some personal lenders don’t charge origination fees.

Prepayment penalties are imposed if you repay the loan before the term expires. However, prepayment penalties are becoming less common on personal loans. It’s always good to read the fine print to check for a prepayment penalty if you plan to pay off your loan early.

The annual percentage rate (APR) on your personal loan will include the interest rate as well as any fees, so it is a more accurate measure of the cost of a loan than an interest rate alone.

Use Credible’s personal loan calculator to see how your monthly payments and total loan cost fluctuate with interest rates. While you’re at it, shop around to find the lowest interest rates for your situation.

You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

Bernadine J. Perkins