Personal Loan Rates Plunge to Record Low

Personal loans offer fast access to a lump sum of cash that’s repaid in predictable monthly installments usually at a fixed interest rate. Because they often don’t require collateral, personal loans can be used as you see fit – whether you want to consolidate credit card debt or finance home improvements.

One of the most important factors to consider when borrowing a personal loan is the interest rate: The lower your rate, the less you’ll pay in financing costs over time. And if you’re thinking about applying for a personal loan, there’s some good news.

The average interest rate on a two-year personal loan dropped to a record low of 8.73% during the second quarter of 2022, according to the Federal Reserve. This is the first time personal loan rates dropped below 9% since the Fed began collecting this data 50 years ago.

It’s difficult to say exactly why personal loan interest rates dropped so meaningfully this past quarter. The central bank’s data comes from about 75 banks that regularly report their “most common rate” by dollar volume. It’s possible that the lower averages may be linked to an increase in the share of secured personal loans, which tend to come with more favorable repayment terms since they’re backed by collateral.

With interest rates setting record lows, now may be the right time to borrow a personal loan to meet your financial goals. Here’s what you need to know about personal loan rates today.

Just because average personal loan rates were lower last quarter doesn’t necessarily guarantee that all applicants will get a good rate. Lenders calculate your interest rate based on your financial history, including credit score and debt-to-income ratio. Here are a few tips for getting a low interest rate on a personal loan:

You should also look at the annual percentage rate, or APR, which includes the interest rate and other fees like an origination fee. A personal loan APR gives you a full picture of the cost of borrowing over the life of the loan.

Personal loan payments generally are fixed, which means they remain the same until the loan is repaid in full. Here’s an example: On a $10,000, two-year personal loan with an 8.73% interest rate, you would make 24 monthly payments of about $456. Over the course of repayment, you would pay a total of $935 toward interest charges.

Of course, the monthly payments on a personal loan will vary greatly based on the interest rate, the loan amount and the repayment term. You can see how the term length of a $10,000 personal loan impacts the monthly payment and total interest paid over the course of the loan in the table below.

While long-term personal loans tend to come with lower monthly payments, they are more expensive to repay over time due to higher rates and more interest payments. On the other hand, short-term personal loans come with more competitive borrowing costs, but the monthly payments will be higher.

You can use an online personal loan calculator to estimate your loan costs based on your offered interest rate, loan amount and repayment length.

Personal loans can be used to pay for virtually anything, from essential medical procedures to unexpected home repairs. Like credit cards, personal loans don’t typically require you to use your property as collateral. But unlike credit cards, personal loans usually come with fixed interest rates and monthly payments. With that said, it’s not always a good idea to borrow a personal loan.

A rule of thumb is that you shouldn’t go into debt for unnecessary expenses, like paying for a vacation or buying something you can’t truly afford. Remember that personal loans must be repaid with interest, so you’re essentially inflating the cost of your purchase.

Still, personal loans can prove to be a powerful tool, and they can even help you improve your financial situation in some cases. Here are a few situations in which it may be a good idea to borrow a personal loan.

Personal loans can be used to pay off high-interest credit card debt in fixed monthly payments and often at a lower interest rate. The average rate on credit card accounts assessed interest was 16.65% in the second quarter of 2022, according to the Federal Reserve. That’s significantly higher than the 8.73% rate on personal loans during that same period.

You can potentially use a personal loan to repay the balance of one or more credit cards while saving money and getting out of debt faster. Just be sure not to rack up your credit card balances as you repay the personal loan, or you’ll be stuck with even more debt in the long run.

Homeowners often use home equity loans or lines of credit, called HELOCs, to finance home improvements or repairs. However, these products require you to use your home as collateral, which can run the risk of going into foreclosure if you fail to repay the loan. It can also take several weeks to receive the funds from your home’s equity.

Alternatively, unsecured personal loans don’t use your home as collateral, and you may be able to receive funding as soon as the next day after loan approval. It’s important to note that interest rates on personal loans may be higher than those on home equity loans or HELOCs. Before you make a decision, you should compare rates across all of your loan options, both secured and unsecured.

If you urgently need to purchase a big-ticket item like a household appliance or a new transmission for your vehicle, a personal loan typically offers more favorable repayment terms than revolving credit card debt. And since personal loan funding may be available in as little as a few days, you can have access to the capital you need to get your life back on track.

You should still look into your alternatives before you borrow money. For example, a mechanic may offer an interest-free installment plan to help you afford car repairs. And many prominent retailers offer financing agreements to split large purchases into smaller payments without paying interest. Like with any significant financial decision, it’s important to weigh your options carefully.