What is a good interest rate on a personal loan?

A personal loan is a type of loan that funds quickly and has monthly repayment installments. You can use a personal loan for high-interest debt consolidation, pay for a major purchase or address a financial emergency, among other top reasons. Typically, a personal loan repayment term can be between two and five years, with loan amounts up to $100,000.

The Federal Reserve kept benchmark interest rates near zero during the coronavirus pandemic. Such low interest rates bode well for borrowers, though they may face tighter lending standards from lenders who have felt the pinch of the economic downturn.

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What is the best interest rate for a personal loan?

“The ideal rate for a personal loan is if you can get one that’s lower than the national average,” said Karen Condor, a former banker and current financial expert with Loans.org.

Currently, the average interest rate nationally is 9.65%, according to the Federal Reserve’s most recent data. By contrast, the average personal loans interest rate is significantly higher than the average credit card interest rate, which currently stands at 16.28%. These numbers show personal loans typically have lower rates are one of the cheapest ways to borrow.

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What factors determine a personal loan interest rate?

Personal loan interest rates vary widely, which is partly attributable to the different ways in which lenders assess risk. Generally, most loan lenders weigh credit scores heavily when determining interest rates. To a lender, high credit scores equate to less risk, which translates to qualifying for lower personal loan rates.

Lenders also look closely at your debt-to-income ratio (DTI), which is a percentage that reflects how much of your gross monthly income goes towards paying your total monthly debt payments. Your DTI calculation includes all of your credit card debt and loans. Having a lower DTI ratio signals to lenders you have the budget in your personal finances for a new payment with a lower interest rate.

“Also factoring into your interest rate is your evidence of income, as a higher and more stable income will put you in a better position to secure a lower interest rate,” said Condor.

Additionally, the type of personal loan you apply for has a direct correlation to its interest rate. “An unsecured loan will have a higher interest rate since it is not backed by anything aside from the borrower’s promise to pay,” said Condor. “This means there is virtually no collateral for a lender to claim in the event of a default, so an unsecured loan is a higher-risk product to them.”

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How can I get the best interest rate on a personal loan?

Here are a few ways you can qualify for the best interest rate possible for your personal loan:

1. Improve your credit

You can get a lower interest rate by maintaining a high credit score that demonstrates a history of timely payments. If your credit history and credit score are less than ideal, consider making personal finance moves that are likely to boost your score, such as:

• Reducing credit card balances
• Making payments on time
• Checking your credit reports for errors and fixing them
• Opening a secured credit card

2. Lower your debt-to-income ratio

If your DTI is 36% or above, consider lowering it before applying for a personal loan. Go through your budget and look for ways to reduce balances on your debts, beginning with your highest-interest accounts.

You can also improve your DTI ratio by increasing your annual income through a work promotion or by earning extra money with a side hustle.

3. Shop around with multiple lenders

“While you’re researching, keep an eye out for seasonal offers for lenders,” said Condor. “These can allow you to get limited-period discounts on the interest rate.

HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS

Next steps

It’s helpful to know the personal loan interest rate you would like, and what your credit profile suggests you might receive. More importantly, however, ensure any loan you are considering is the best fit for your needs, and you can afford the monthly payments. Make personal loan payments on time each month, so you’ll be in a strong position to get the lowest rates on any financial products you pursue in the future

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