Best Low Interest Personal Loans | U.S. News

A personal loan can help you pay for debt consolidation, home improvement or other expenses, but you’ll need to pay it back – with interest. Shopping around for a competitive rate, even on a low-interest personal loan, can reduce the interest you pay. Find out where to shop for low-interest personal loans and what to ask before you agree to a new loan. Here’s what you’ll learn:

*Rate as of May. 21, 2021

The lower your personal loan interest rate, the less you’ll pay to borrow money. That affects your monthly payment and could mean you’ll need less time to pay off your loan. Here are a couple of scenarios that show the effects of interest rates on the cost of a personal loan:

Let’s say you received an offer for a $5,000 personal loan with a 9.3% annual percentage rate and a four-year repayment term. With this loan, you’d pay $1,006.66 in interest alone.

Now assume that you were approved for a $5,000 personal loan with a four-year term and a 6.75% APR. By comparison, your total interest charges on this loan would be $719.30, resulting in interest savings of $287.36.

Your personal loan interest rate makes more of a difference if you’re taking out a larger or longer-term loan. The average personal loan balance is $16,259, according to a 2019 personal loan study from the credit bureau Experian.

If you took out a $16,259 personal loan with the same 9.3% APR but a six-year term, interest charges would increase to a sizable $5,017.28. If you can shop around for a loan and get the same term length at 6.2% APR, you would spend $3,252.73 and save close to $1,800.

There are two pieces of good news: Low-interest personal loans are available, and the average interest rate for all personal loans is about 12%. That’s particularly helpful if you need to pay off high-interest credit card debt.

You’ll pay down debt faster on a personal loan than on credit cards with higher interest rates, says David Bakke, personal finance expert at Dollar Sanity, a financial education website.

Getting a good personal loan rate, though, depends on your credit profile. This often includes your credit history and score, your income and your debt.

All lenders have their own criteria to set applicants’ personal loan interest rates and terms.

Here are a few key areas that lenders look at to determine personal loan approvals and interest rates:

Your credit score is one of the major factors lenders consider for personal loan eligibility, says Lauren Anastasio, certified financial planner at SoFi, a personal finance company. “Lenders don’t always disclose whether they have a minimum credit score for applicants, but often they prefer to see a good or excellent credit history,” she says.

Meeting the minimum credit score doesn’t mean you’ll qualify for the lowest loan rates advertised. A FICO credit score in the mid-700s or higher is considered very good to exceptional and generally earns you a competitive interest rate. Borrowers with fair or bad credit shouldn’t expect low interest rates on personal loans.

A co-signer, ideally one with strong credit, is held liable for repaying your loan if you can’t. Lenders may approve a loan at a lower interest rate when you have a co-signer.

“If you don’t have a stellar credit score or don’t make very much, adding a co-borrower to your loan might increase your chances of approval,” Anastasio says. “They might also help you get a better interest rate and repayment terms.”

Lenders will evaluate your income to ensure that you earn enough to repay the loan. Your debt-to-income ratio is the percentage of your monthly income you put toward debt. It helps lenders gauge whether you can manage a personal loan payment without financial hardship.

“And, in a nutshell, the maximum debt-to-income ratio you want if you’re looking for a personal loan is right around 35%,” Bakke says. “Anything higher than that and the lender will be thinking twice about whether or not to extend the loan.”

Additionally, some lenders may have a minimum annual income requirement.

Whether your personal loan is secured or unsecured can influence your interest rate. With a secured loan, you’re providing collateral that the lender can claim if you default on your loan.

“Secured loans, backed by assets owned by the borrower, like a car or house, are less risky to the lender and therefore often come with much lower interest rates, reducing the cost of borrowing over the life of the loan,” Anastasio says.

Before jumping on a secured personal loan, factor in the risk of losing your collateral, such as your home, if you can’t make the monthly payments.

Some lenders offer a small APR percentage point reduction for existing customers or for signing up for automatic payment options. Some lenders list interest rates that include autopay discounts.

Take these steps to find the lowest rates on personal loans.

Lenders may advertise an APR range, but you won’t find out your rate until a lender checks your credit. Prequalification can tell you whether you could be approved for a low-interest personal loan and it only uses a soft credit inquiry, which doesn’t affect your credit score.

“Many lenders allow potential borrowers to see if they prequalify for a loan before applying,” Anastasio says. “This process shows how much the loan would potentially be approved for, what your repayment terms and your interest rate could possibly be.”

Not all lenders offer prequalification options, but online lenders generally do. You’ll submit basic information, such as how much you want to borrow and your income, and the lender will perform a soft credit check. This option gives you great insight into whether you might meet borrower criteria and what terms you could get without committing to the loan or hurting your credit with a hard credit check.

Plus, the process can be quick. Some lenders let you check rates and prequalification online, which can take just minutes.

2. Check With Your Bank or Credit Union

When you’re rate shopping, getting a quote from a financial institution you have a relationship with could pay off. “Your bank or credit union would be a great place to start,” Bakke says. “However, rates and fees do vary, so it’s recommended that you get quotes from at least three lenders.”

Your bank or credit union might be able to offer a more competitive rate or origination fee than rivals because it has a window into your finances that the others don’t. If you have deposit accounts, for example, the bank may consider your wages, spending patterns and savings.

3. Be a More Attractive Borrower and Try Again

If you can’t get approved for a competitive interest rate on a personal loan, you might want to wait. Take time to focus on raising your credit score and reapply.

Check your credit reports for errors that you can dispute, pay down debt, make on-time monthly payments, and take other steps to improve your credit before you apply for a personal loan.

Carefully review personal loan options before you commit to a loan. Read full reviews to find the best personal loan lenders with the lowest rates. Loan terms vary, but a personal loan review can tell you about what you can expect from a lender. In addition to interest rate, learn about each lender’s: