If you are considering taking out a personal loan, then you should also understand what the personal loan rates are as well. This is a crucial step to take because the interest rate on your loan significantly impacts the total cost of borrowing. This in turn affects your monthly payments and the overall amount you will have to repay.
What’s more, numerous lenders are offering different rates and different terms. It is essential to be well informed about what personal loan rates to make the best financial decision. Knowing the influence these rates have on your finances it helps you know how to secure the best rate and you can minimize the cost of borrowing and ensure that the loan you borrow aligns with your financial goals.
What are Personal Loan Rates?
Personal loan rates, also known and expressed annual percentage rate (APR), represent the extra cost you get when you borrow money from a lender. The APR includes the interest rate and other fees, giving you a clear picture of what the loan will cost over time.
Furthermore, personal loan rates vary depending on several factors, which include your credit score, loan amount, loan term, and the lender’s policies. Personal loans are typically unsecured, so they don’t require any collateral. As a result, the rates on personal loans are usually higher than secured loans like mortgages or auto loans.
However, they can still be a more preferable option for consolidating debt, financing large purchases, or covering any unexpected expenses.
Factors That Influence Loan Rates
Understanding the factors that influence personal loan rates can help you secure the best possible rate. Here are the key factors to consider that influence what your personal loan rate will be:
Credit Score
Your credit score is one of the biggest factors that lenders consider to determine your personal loan rate. Having a higher credit score indicates that you’re a lower risk to lenders, leading to them offering you a lower interest rate.
The range of good to bad credit scores includes:
- Excellent Credit (750+): Borrowers with excellent credit scores in this range often qualify for the lowest rates, sometimes as low as 5% APR.
- Good Credit (700-749): Borrowers with good credit scores can expect rates that range from 6% to 12% APR.
- Fair Credit (650-699): Borrowers with fair credit scores may see their own rates range from 13% to 20% APR.
- Poor Credit (Below 650): Borrowers with poor credit scores may face rates above 20% APR, or they may even struggle to get approved for a loan.
Loan Amount
The amount you wish to borrow is another fact that also influences your personal loan rate. If you borrow larger amounts, it results in you getting lower interest rates, since the lender may view larger loans as less risky. However, this isn’t always the case, and it depends on the lender’s specific policies
Debt-to-Income Ratio
Your debt-to-income ratio is another factor that is used to determine your ability to pay back the loan. Coincidently, it is also another factor that influences your personal loan rates. Having a lower DTI ratio suggests that you have more income to cover new debt, which can help you secure a lower interest rate.
Lender Terms
Different lenders have varying, different policies and criteria for setting personal loan rates. Some lenders may offer lower rates to attract borrowers with excellent credit, while others may focus on providing loans to borrowers with less-than-perfect credit but at higher rates. This is why it is very crucial as a borrower to shop around and compare offers from multiple lenders to find the best rate.
How to Find the Best Personal Loan Rates
Being able to find the personal loan rates will involve you shopping around and comparing deals. Still, here are other ways that you can get the best personal loan rates:
Improve Your Credit Score
If your credit score isn’t good and it won’t get you far, then start taking steps to improve it before you apply for a loan. This means you should pay off outstanding debts, make all your payments on time, and avoid taking on new credit. Even something as small as a little increase in your credit score can lead to you getting a better interest rate.
Compare Multiple Lenders
Even if the first offer you come across sounds good, you shouldn’t settle for it yet. There are different lenders with different policies for determining loan rates and different services. So, it is crucial you compare rates from multiple lenders and sources, like credit unions, banks, etc.
Consider the Loan Term
You might be really tempted to select a loan term that is longer to get lower monthly payments. However, you should also remember that it results into having higher interest rates. If you can afford it, then go for a shorter loan term so you save on the interest costs over the life term of the loan.
Use a Co-Signer
If your credit score isn’t strong enough to get you a low rate, another option to go for is using a co-signer who has excellent credit. A co-signer agrees to take responsibility for the loan in case you default. This also reduces the lender’s risk and can result in you getting a lower interest rate.
Lenders You Can Work To Get Loans
Here are lenders you can work with to borrow personal loans from and possibly get good personal loan rates from:
- SoFi
- LendingPoint
- Avant
- Prosper
- Best Egg
- Upgrade
- Citi
- OneMain Financial
- Happy Money
- LendingClub
- Achieve
- Upstart
- LightStream
- Reach
- Discover
- PenFed
These lenders offer varying personal loan options for borrowers of all ranges of credit score. You can check out their policies, loan terms, and services so you can see the one that best suits your financial needs.
Frequently Asked Questions
Here are some frequently asked questions you can check out:
What is a good interest rate for a personal loan?
A good interest rate for a personal loan ranges from 6% to 12% APR for borrowers with good to excellent credit. If you see rates that are above 12%, they are considered higher and are usually offered to borrowers with fair or poor credit.
Are personal loan rates fixed or variable?
Actually, personal loan rates could either be fixed or variable. The fixed rates mean it remains constant throughout the loan term, while variable rates can change over time based on market conditions.
What happens if interest rates decrease after I take out a loan?
If you have a fixed-rate loan, this means your interest rate will remain the same even if rates decrease. However, if you have a variable-rate loan, your rate may also decrease, leading to lower monthly payments.