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Generally, a good interest rate for a personal loan is one that's lower than the national average, which is 9.41%, according to the most recently available Experian data. Your credit score, debt-to-income ratio and other factors all dictate what interest rate offers you can expect to receive.
But it's also important to look beyond interest when evaluating personal loan options. Understand your loan term, or how long you'll pay it back, as well as fees you could be charged, such as origination and late payment fees.
Read on for more about what you need to know about personal loan interest rates.
What Is the Average Interest Rate on a Personal Loan?
The average interest rate on a personal loan is 9.41%, according to Experian data from Q2 2019. Depending on the lender and the borrower's credit score and financial history, personal loan interest rates can range from 6% to 36%. It's important to learn how personal loan interest rates work to better understanding how much your monthly payments will be for the loan, and how much you will pay for the lifespan of the loan.
A personal loan is a form of credit that allows consumers to finance large purchases, such as a home renovation, or consolidate high interest debt from other products like credit cards. In most cases, personal loans offer lower interest rates than credit cards, so they can be used to consolidate debts into one lower monthly payment.
The average personal loan interest rate is significantly lower than the average credit card interest rate, which was about 17% as of November 2019, according to the Federal Reserve.
What Affects Personal Loan Interest Rates?
Personal loans are considered unsecured debt, which means there is no collateral, such as a home or car, to back the loan. That can account for why your personal loan interest rate may be higher than the rate for your mortgage or auto loan. Personal loans also generally use the term APR, or annual percentage rate, to refer to additional loan costs beyond the principal balance. This number includes the fees you'll pay in addition to interest.
One of the biggest factors contributing to the interest rate you'll receive is your credit score. With a higher credit score—as close to 850 as possible in most scoring models—you'll have the best chance at lower rates. High credit scores, in lenders' eyes, correlate to less risk; if you have a history of making on-time payments and avoiding taking on more debt than you can afford, you're more likely to pay off your personal loan as agreed.
Lenders will also look at your debt-to-income ratio, or DTI, which is calculated by dividing the total debt payments you make each month by your gross monthly income. Debts included in the DTI calculation include student loans, credit card bills, auto loans, mortgages and existing personal loans. A lower DTI means you have more room in your budget to take on a new payment, and may mean a lower interest rate.
If you can't qualify for a personal loan on your own, or you want a lower interest rate, some lenders also allow you to apply with a creditworthy cosigner. That person will have to apply along with you, and the lender will assess their credit score, DTI, annual income and ability to repay the loan. That's because if you can't make payments, your cosigner will be responsible for them. Make sure you both understand that, and are comfortable with the loan's repayment terms, before moving forward.
How to Compare Personal Loans
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. Submitting a loan application will cause a hard inquiry—more on that in a bit.
You can get interest rate estimates from a range of lenders to understand the rate you'll likely receive, and pick which lender you'll submit a full application to. When considering offers, compare the following:
- APR: Since this 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.
- 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.
- Monthly payment: How much will you pay per month, and does that fit within your current budget? Will you be able to continue making minimum payments on your other debts and cover essential expenses?
- Fees: Understand how much your lender will charge in origination fees, late fees or prepayment penalties for paying off the loan early.
How Personal Loans May Affect Your Credit Scores
Although it's important to shop around for the lowest interest rate, submitting applications to multiple lenders will lead to several hard inquiries on your credit report. That can have a small negative effect on your credit score before they drop off after two years.
One way to avoid multiple hard inquiries on your credit report is to comparison shop during a short time period to minimize the impact. Most credit scoring models will count several hard inquiries for the same type of credit product as a single event if they occur in a window of a couple weeks.
In addition to prequalification, some lenders may also offer you preapproval, which the lender initiates to determine whether you are qualified for a loan. Preapprovals lead to soft inquiries only.
Personal loans can help improve your credit score if you develop a history of on-time payments; they may also boost your score if they add to the types of credit in your file. But if you pay late or miss payments altogether, your score will suffer—which can limit your ability to access other forms of credit at favorable terms.
Personal Loans Beyond the Interest Rate
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.