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How to Get the Better Personal Loan Rates
When you need a personal loan for home repairs, debt consolidation or any other reason, getting the best interest rate matters. Qualifying for a good rate hinges largely on your credit scores – the better your credit, the lower your rate.
If you’re wondering how to get the best personal loan rates, these tips can help.
What Is a Good Interest Rate on a Personal Loan?
Personal loan interest rates can vary from lender to lender and borrower to borrower. A lower rate is generally better,as it translates to less interest paid on the loan.
According to Federal Reserve data, interest rates for a 24-month personal loan averaged 9.34% through the third quarter of 2020. Compared to the 16.61% average APR for credit cards over that same period, getting a personal loan could be a more attractive borrowing option.
A good interest rate for a personal loan is essentially the best rate you can qualify for, based on your credit score and financial situation. Excellent credit is likely to get you the lowest rates; poor or bad credit is likely to get you the highest.
What Affects Personal Loan Rates?
Credit scores are one of the most important things lenders consider when you apply for a personal loan. A higher credit score suggests that you’re more responsible when it comes to managing debt.
But credit scores aren’t the only thing that can influence the interest rates you pay for a personal loan. The rates you’re offered for a loan can also depend on:
- How much you want to borrow
- The length of the loan term
- Your debt-to-income ratio (DTI)
- Your overall financial situation, including your employment history
Where you decide to get a personal loan can also affect interest rates. Banks, credit unions and online lenders can each set interest rates for personal loans differently.
How Do I Get a Better Interest Rate on a Personal Loan?
Getting a better interest rate on a personal loan is possible but it requires some strategy. If you’re planning to apply for a personal loan, there are some things you can do beforehand to improve your odds of getting the best interest rates.
1. Check your credit
Lenders will check your credit when you submit a loan application so it’s helpful to know what they’re going to see. Checking your credit reports and credit scores can help you gauge what type of interest rates you might be offered.
2. Dispute credit report errors
Credit reporting errors could cost you money if they result in higher personal loan interest rates. Once you have your credit reports, review them to make sure all the information is accurate. If you spot an error, you can dispute it with the credit bureau that’s reporting it.
By federal law, the credit bureau is required to investigate your claim within 30 days. If an error exists, the credit bureau is required to correct it or remove it from your credit reports. If no error is found, you have the right to be notified in writing.
3. Reduce your debt
Debt-to-income ratio is a measure of how much of your income goes to debt repayment each month. The lower this number is, the better for the purposes of getting a personal loan.
If you owe credit cards or other loans, paying down the balances could help improve your DTI ratio. Reducing what you owe on credit cards can also help improve your credit utilization ratio. This is the percentage of your available credit you’re using. The lower your card balances are compared to your card limits, the more that could improve your credit score.
4. Compare loan options carefully
When aiming for the best personal loan rates, it’s to your advantage to shop around. Comparing loan options from different lenders can help you find the right fit.
As you compare loans, pay attention to the interest rates. But also keep in mind:
- Whether the rate is fixed or variable
- Whether the lender offers any interest rate discount opportunities, such as a slight rate reduction if you enroll in automatic payments
- Length of the loan repayment term
- Any loan fees you might pay (i.e. origination fees or prepayment penalties)
- Minimum and maximum loan amounts
It doesn’t hurt to think long-term, either. If you’re taking out a larger personal loan, say $50,000 to tackle a home renovation, then you might be interested in refinancing that loan later if interest rates drop. Refinancing to a new loan with a lower rate could trim off some of the interest costs, assuming you aren’t extending your loan term.
Getting the best loan rates means doing a little legwork beforehand. But it could be time well spent if it allows you to qualify for the lowest possible interest rates, based on your credit and finances.
Rebecca Lake is a freelance writer specializing in personal finance, credit and debt. She’s a contributor to U.S. News and World Report, Forbes Advisor and The Balance and her work has appeared online at CreditCards.com, MyBankTracker, Money-Rates.com and dozens of other top publications.