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A good personal loan interest rate is typically one that's lower than the national average rate, which is currently 10.16%. Because interest rates can vary based on a number of factors, including economic conditions, that average can fluctuate over time.
The interest rate you qualify for is also based on a number of factors, so it's important to prepare yourself before applying for a personal loan.
What Is the Average Interest Rate on a Personal Loan?
The average interest rate on a two-year personal loan as of October 2022 is 10.16%, according to the Federal Reserve. But depending on the lender, the borrower's credit score and financial situation and other factors, personal loan interest rates can generally range from under 6% to 36%—although higher interest rates aren't unheard of in states where it's allowed.
It's important to learn how personal loan interest rates work to better understand how much your monthly payments will be for the loan and how much you will pay over the life of the loan.
What Factors Affect Personal Loan Interest Rates?
Lenders that offer personal loans use a risk-based approach to interest rates, which means the lender will consider how likely you are to default on the debt when deciding your interest rate.
With that in mind, here are some of the factors that can impact personal loan interest rates:
- The lender: Each lender has its own set of interest rates and criteria for determining which rate you qualify for. As you shop around and compare loan offers, you may get a wide variety of rate quotes for this reason.
- Market conditions: As the Federal Reserve adjusts its federal funds rate, those decisions affect the prime rate, which is what lenders often use to determine their own rates. If the federal funds rate goes up or down, personal loan interest rates typically follow suit.
- Credit score: There are personal loans available to consumers across the credit spectrum, but higher credit scores are typically associated with lower interest rates.
- Credit report information: While your credit score provides a snapshot of your overall credit health, it doesn't tell the full story. Lenders may also review your credit reports for missed payments, high credit card balances, recent credit inquiries and other items that may signify risky credit behavior.
- Loan amount: The more you borrow, the more risk the lender takes in the event that you default. As a result, higher loan amounts may have higher interest rates.
- Repayment term: Longer loan repayment terms typically come with higher interest rates because of interest rate risk. In other words, if loan rates go up after the lender disburses your loan, it'll take longer for it to take advantage of the increase than if you were to have a shorter term.
- Debt-to-income ratio: Lenders will typically have a minimum income requirement. But in addition to that, the lender will review how much of your gross monthly income goes toward debt to determine whether you can afford to take on a new loan. Higher debt-to-income ratios typically result in higher interest rates.
- Collateral: Some lenders offer secured personal loans, which means you can use a savings account, certificate of deposit or some other asset as collateral for the loan. If you default, the lender can seize the collateral to satisfy the debt. Secured personal loans typically come with lower interest rates, but they may not be an option if you don't have any assets that can secure the loan.
How to Compare Personal Loans
Shopping around and comparing offers from multiple lenders is the best way to make sure you're getting the best deal.
Fortunately, some lenders will let you estimate your interest rate without submitting a full application, a process called prequalification. This results in a soft inquiry, which won't affect your score.
By prequalifying with multiple lenders, you can get quotes to compare loans before you submit an official application.
When considering offers, compare the following:
- APR (annual percentage rate): APR incorporates both your interest rate and fees, it reflects the total cost of your loan. It's likely the most important piece of information to use when comparison shopping.
- Loan term: This is the length of time or number of installment payments it will take to pay off the loan. Often, shorter loan terms lead to cheaper APRs.
- Fees: Understand how much each lender charges in origination fees, late fees and other charges. The big one is the origination fee, which can range from 1% to 10% of the loan amount. Some lenders don't charge one at all, though.
- Monthly payment: Between the APR and loan term, it's important to understand how much you'll pay per month and whether that figure fits within your current budget. It's especially important to make sure you can cover monthly payments on your other debts, as well as your essential expenses.
- Discounts available: You may be able to lower your rate by getting a loan from a bank or credit union where you already have other accounts or if you set up automatic payments.
How Personal Loans Affect Your Credit Score
A personal loan can impact your credit score in a few different ways, and depending on how you manage the debt, a loan can help or hurt your credit in the long run.
- Credit inquiry: While prequalification won't affect your credit score, submitting an official application will result in a hard inquiry, which can affect your score. Each additional inquiry typically takes fewer than five points off your credit score, according to FICO, but a lot of inquiries in a short period can have a compounding effect.
- Amount owed: How much you owe is another factor in your credit score, and depending on how much you borrow and how it compares to the rest of your debt, the new loan could potentially have a temporary negative effect on your score.
- Length of credit history: Each time you open a new credit account, it lowers the average age of your accounts, which can cause a temporary decline in your credit score. Over time, however, having a high average age of accounts can be a good thing.
- Payment history: Your payment history is the most important factor in your FICO® Score☉ , so if you make all of your personal loan payments on time, the loan can help improve your score over time. If you miss one or more payments, though, the loan can do some long-term damage to your score.
Consider How the Loan Will Affect Your Financial Plan
It's important to be aware of the personal loan interest rate you should aim for and what you're likely to receive based on your credit profile. But it's even more crucial to make sure that a personal loan is the right fit for you and that you can afford its monthly payment for the entire loan term. Manage a personal loan responsibly so that you're in the best position possible to get other financial products at low rates in the future.