Personal loan rates are lower now than they’ve been all year, according to the Federal Reserve. This is good news for consumers who want to use a personal loan to consolidate debt, finance home improvements or pay for large expenses.
The average interest rate on a two-year personal loan fell to 9.39% in Q3 2021, according to the Fed’s report, compared to 9.58% in Q2 and 9.46% in Q1. But just because the average personal loan interest rate remains low doesn’t mean all borrowers will qualify for a low rate.
Keep reading to learn more about how personal loan rates are determined and how you can qualify for a good interest rate. When you’re ready to apply for a personal loan, compare rates across personal loan lenders without impacting your credit score on Credible.
How are personal loan interest rates determined?
Personal loans are typically unsecured, which means they don’t require you to put up an asset as collateral in the event you don’t repay the loan. Without collateral, lenders must use a borrower’s credit history to determine their likelihood of default.
Lenders judge your financial responsibility using your credit score and debt-to-income ratio (DTI). Borrowers with bad credit and high DTI are historically less likely to repay the loan in full, which makes it a riskier bet for the lender. On the other hand, borrowers with good credit and a low DTI are safer investments for lenders, which grants them a better chance of being approved at a lower interest rate.
In addition to your credit score, there are a few other factors personal loan lenders consider when setting interest rates: the loan amount and the loan length. A personal loan with a larger loan amount and short repayment term may come with a much higher interest rate than a small loan that’s spread across a longer term of monthly payments.
Plus, your interest rate is just one factor in calculating the total cost of a personal loan. You’ll want to look at the annual percentage rate (APR), which is the total cost of borrowing the loan, including the interest rate and origination fees. Some personal loan lenders don’t charge an origination fee. In this case, the APR is the same as the interest rate…Read more>>