When applying for a personal loan, one of the most important factors to consider is the interest rate. A lower interest rate can save you hundreds or even thousands of dollars over the life of the loan, while a high rate can make borrowing much more expensive.

Understanding how personal loan interest rates work and how to qualify for the lowest possible rate can help you make a smart financial decision.

What is a Personal Loan Interest Rate?

A personal loan interest rate is the percentage a lender charges you for borrowing money. It determines your monthly payment and the total cost of your loan. The lower the rate, the less you pay in interest over time.

There are two main types of interest rates. A fixed interest rate remains the same throughout the loan term, providing predictable payments. A variable interest rate changes based on market conditions, which means it can start lower but may increase over time. Fixed rates are generally better for those who want stable monthly payments and protection from rising interest costs.

How Personal Loan Interest Rates Are Calculated

Lenders determine your rate based on multiple factors, including your credit score, debt-to-income ratio, loan amount, loan term, and type of lender.

Credit Score

Your credit score has the biggest impact on your interest rate. A higher credit score leads to lower interest rates and better loan offers. For example, borrowers with excellent credit (750 and above) can expect rates between 5% and 10%, while those with poor credit (below 580) may see rates as high as 36% or may be denied a loan.

Debt-to-Income Ratio (DTI)

Lenders check your DTI to ensure you can afford payments. A DTI below 36% is considered excellent and improves your approval chances. If your DTI is above 50%, your chances of approval decrease significantly.

Loan Amount and Term

Higher loan amounts can sometimes result in lower interest rates, especially if the borrower has strong credit. Shorter loan terms, typically 24 to 36 months, usually come with lower interest rates compared to longer terms of 60 to 84 months.

Type of Lender

Different lenders offer varying interest rates. Banks generally provide rates between 6% and 24% but have stricter requirements. Credit unions often offer lower rates, even for fair credit borrowers, with APRs between 6% and 18%. Online lenders provide the widest range, from 5% to 36%, depending on the borrower’s creditworthiness.

How to Get the Lowest Personal Loan Interest Rate

Improve Your Credit Score Before Applying

Paying off credit card balances, making on-time payments for at least six months, and disputing errors on your credit report can all help improve your credit score and lower your interest rate.

Compare Lenders and Prequalify

Prequalifying allows you to check potential interest rates without affecting your credit score. Loan marketplaces like LendingTree help borrowers compare multiple lenders at once. Some of the best lenders for low APRs include SoFi, LightStream, Marcus by Goldman Sachs, and Upgrade, each offering different loan amounts and interest rates.

Consider a Secured Loan

Secured personal loans, which are backed by collateral such as a car or savings account, often have lower interest rates than unsecured loans. However, missing payments could result in losing the collateral.

Choose a Shorter Loan Term

Shorter loan terms come with lower interest rates and less overall interest paid. A 24- to 36-month loan will generally have a lower APR than a 60- or 84-month loan. Using a loan calculator can help determine the best balance between monthly payments and interest savings.

Apply with a Co-Signer

If your credit is less than ideal, applying with a co-signer who has good credit can help you qualify for a lower interest rate and improve your chances of approval. Both parties are responsible for repayment, so it’s essential to choose a co-signer who understands the commitment.

Personal Loan Interest Rate Calculator Example

A borrower with good credit (700+) taking out a $15,000 loan at an 8% APR for three years would have a monthly payment of $470 and pay $1,913 in total interest. In contrast, a borrower with fair credit (650-699) receiving a 15% APR on the same loan would have a $520 monthly payment and pay $3,704 in total interest. A 7% difference in APR results in an extra $1,791 in interest costs.

Final Tips for Getting the Best Loan Rate

Checking your credit report for errors, comparing at least three lenders, choosing a shorter loan term, and considering a secured loan or co-signer can help secure the lowest possible interest rate. Prequalifying before applying ensures you do not trigger unnecessary hard credit inquiries.

Conclusion

Your personal loan interest rate directly impacts your monthly payments and the total cost of your loan. Good credit leads to lower rates, shorter terms reduce interest costs, and comparing lenders helps secure the best deals. By following these strategies, you can qualify for the lowest possible interest rate and save thousands over the life of your loan.

Frequently Asked Questions

What is a good personal loan interest rate? Anything below 10% APR is considered excellent.

Can I get a personal loan with a 600 credit score? Yes, but expect higher interest rates ranging from 15% to 36%.

Does prequalification affect my credit score? No, prequalification uses a soft credit check, which does not impact your score.