What is the average personal loan interest rate (and why is it important)?
If you’re looking to consolidate debt, cover unexpected expenses, or borrow money for a big purchase, a personal loan may be your first choice. And of course, one of the most important factors to consider when taking out a personal loan is the interest rate. Currently, the average interest rate on personal loans is around 12% to 13%. However, it’s important to note that this figure is just a guideline and individual interest rates can fluctuate greatly based on a variety of factors. Let’s take a look at the current state of personal loan interest rates and find out how you can get the best rate for your financial situation.
How personal loans work
Personal loans are usually unsecured loanswhich means no collateral is required. The lender will lend you a certain amount of money, which you will pay back in fixed monthly installments over a set period of time. The interest rate on the loan will determine how much you will have to pay back in addition to the loan amount.
Why interest rates are important
The interest rate on your personal loan has a significant impact on the overall cost of the loan. Even a small difference in the interest rate can add up to hundreds or thousands of dollars over the life of the loan. For example, on a $10,000 loan with a three-year term, you would:
- At an interest rate of 10%, pay a total of $1,616 in interest
- At an interest rate of 13%, pay a total of $2,135 in interest
That’s $519 less – or, to put it another way, no small amount of money. A higher interest rate means you’ll pay more interest over the life of the loan, which can potentially add thousands of dollars to the total amount you pay back.
Ideal interest rates
While the average is around 12-13%, the ideal interest rate for a personal loan is as low as possible. According to lawyer Leslie Tayne The best signature loan rates today for the most creditworthy borrowers, or those with “very good” credit scores of about 740 and above, can be around 5% to 6%, although many lenders start their rates at around 7% to 9%. “These borrowers have demonstrated through their past history that they are a low risk,” Tayne explains. “They typically pay their bills on time, keep their debt low, and don’t overuse their credit limit.”
On the other end of the spectrum, debtors with bad credit must pay interest rates of more than 30% for an unsecured personal loan. These debtors have a history of problems with missed payments and even debt collections or bankruptcy declarations. “Because they have a history of difficulty managing their debt, they pose a high risk to lenders and must pay subprime interest rates,” says Tayne. In general, any interest rate below average is considered good, especially if it is lower than the interest rates on your existing debt.
How to take out a personal loan
The process of applying for a personal loan is a little more involved than simply walking into your bank and asking for money, especially without putting up any collateral. Lenders will review your credit history, credit score, income, employment status, existing debts and overall financial situation before deciding whether to give you a loan and at what interest rate.
The most common sources of unsecured personal loans are banks, credit unions and online lenders. Many allow you to begin the process online or over the phone. You will need to provide information such as your name, contact information, social security number, income, the amount you want to borrow and how you will use the funds. The lender will then review your credit history and other financial details before letting you know if you have been approved or rejected.
Tips for getting the best loan interest rate
- Check and improve your credit score: Your credit score is one of the most important factors lenders consider. Pay your bills on time, reduce your credit card debt, and correct any errors in your credit history.
- Compare offers: Don’t settle for the first offer you see. Compare interest rates from multiple lenders, including banks, credit unions and online lenders.
- Consider a secured loan: If you’re having trouble getting a low interest rate on an unsecured loan, a secured loan (using collateral) might offer better terms.
- Find a co-signer: A Co-signatories with excellent credit could help you get a lower interest rate.
- Choose a shorter loan term: Shorter running times often offer lower interest rates, although your monthly payments will be higher.
- Improve your debt-to-income ratio: Pay back existing debts and avoid taking out new ones before applying for a loan.
- Show stable income: Lenders prefer borrowers with regular, reliable sources of income.
- Look for interest rate discounts: Some lenders offer discounts to retain existing customers.
Understanding personal loan interest rates and how they affect your borrowing costs is crucial to making informed financial decisions. By focusing on improving your credit score and carefully comparing interest rates, you can save a tidy sum over the life of your loan.
