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The number of personal loans increased in 2022 and will likely continue in 2023 as many lenders softened their lending requirements to assist in the nation’s economic recovery. However, those standards are expected to rise if unemployment rises, the economy remains in a state of flux, and delinquencies increase.
To blunt the effects of inflation, the Federal Reserve has also raised rates several times over the past year. That directly impacts how much it costs to borrow money for all types of loans, including cars, houses, and credit card debt, in addition to personal loans. This did not stop people from tapping into personal loans, which grew more than 34% in 2022 vs. 2021. However, that was offset by 60 days past due delinquencies, which saw a 54% year-over-year increase.
Although it will cost you more, personal loans are still an attractive credit option if you need quick cash because you can usually get funded within a couple of days after approval. This form of credit also makes more sense if you’ve got a good credit score, which significantly impacts your borrowing money cost. In many cases, personal loans are an excellent way to consolidate and pay off costly credit card debt.
However, personal loans are not a smart move for everyone. It’s best to sit tight unless you have a specific and viable purpose for the funds vs. just having cash on hand. They also aren’t a good idea is you don’t have spending discipline, or you can’t afford the monthly payments.
What Factors Determine the Personal Loan Interest Rates?
One of the most critical factors is your credit score. This is a huge indicator of your overall credit history where lenders can discover if you’ve got any bad credit blemishes to see if you qualify for a lower interest rate or if you’re best suited for higher interest rates on a personal loan.
According to a late 2022 poll by NerdWallet, here’s what you can expect as an estimated annual percentage rate based on your credit score range.
| Score Range | Estimated APR |
| 720-850 | 11.3% |
| 690-719 | 15.6% |
| 630-689 | 22.3% |
| 300-629 | 25.2% |
If your credit score is below 500, you’re unlikely to qualify for a personal loan. The best personal loans at competitive rates are reserved for those with excellent credit scores. Those with minimum credit scores won’t get the best personal loan rates and loan offers, let alone loan approval in several cases.
For comparison, the average credit card interest rate in early 2023 is just shy of 20%.
Another factor is your debt-to-income (DTI) ratio. Your debt-to-income ratio compares your debt payments to your monthly gross income, which is how much you earn each month before taxes and other deductions. Your DTI ratio gives lenders a clearer picture of your current debt and income and is used to determine how much money you can afford to borrow responsibly.
For example, if your total monthly payments are $2,000 and your gross monthly income is $8,000, your debt-to-income ratio is 25%. Lenders generally like to see a DTI of 40% or less to approve a personal loan.
Lenders also want to know about your employment history and other sources of income to reassure them that you are a good risk.
Credit utilization is another factor. This measures the amount of credit you have vs. the amount of debt you have on your credit instruments. A low utilization rate overall and on individual accounts is generally better for your score.
If your ratios are too high, you’ll be rejected for a personal loan. It’s best to pay down your existing debt, if possible, and hold off making large purchases before securing a personal loan.
The Pros and Cons of Personal Loans
Personal loans work best under certain circumstances. Some of the reasons that favor taking out a personal loan include the following:
Lower APR than other forms of credit. Credit cards, especially those with high variable interest rates, are typically higher than personal loan rates. Some cards offer 0% interest rates during introductory periods, but those rates jump significantly when the initial period is over.
Fixed rates and payments. When you lock in a personal loan with a fixed rate, you know exactly what your loan payments will be over the life of the loan. While some personal loans have variable rates, you do run the risk of the unknown and can pay the price if your variable APR goes up due to macroeconomic conditions.
No collateral. Unlike home equity or car loans, you don’t need to secure your loan with an asset.
Variable loan amounts. You get to decide how much of a loan you need based on how you plan to use the money. You’ll only be limited by how much the lender decides to loan you based on your creditworthiness.
These pros are offset by a few cons as well.
Potentially high-interest rates. If you have a low credit score or blemishes on your credit report, you could pay a high price for the privilege of borrowing money. In some instances, it’s wise to clean up these problems before applying for a personal loan if you have that flexibility.
Added fees. Some lenders tack on origination fees, late or application fees, or a prepayment penalty, which can drive up the cost of your borrowing.
Added debt. If you have trouble being disciplined with your money, adding personal loan debt may create problems beyond simply paying off what you owe. Temptation could lead to more financial issues than you can handle sensibly.
Alternatives to Personal Loans
If you need access to more funds but are not sure a personal loan is right for you, consider these alternative options.
A home equity loan. If you own a home with enough equity, you can borrow against that asset with a home equity loan. They are similar to personal loans but are secured by your home as collateral, meaning a lender can foreclose on your home if you do not pay your loan as promised. Personal loans are unsecured by typically have a higher APR range.
HELOC. A home equity line of credit taps your home’s equity and operates like a credit card. A HELOC application process usually comes with a variable interest rate, and you can borrow some or all of the amount you’re approved for or none at all. Similar to a home equity loan, a lender can foreclose on your home if you fail to repay the loan.
0% APR credit card. It’s possible to qualify for a 0% introductory APR credit card. You often get that rate for 12 months or more as a perk, and as long as you repay what you borrowed before the introductory period ends, you won’t pay any interest on the money you borrowed against the card. You’ll need good to excellent credit to qualify, meaning your FICO score should be 670 or higher.
How to Secure a Competitive Personal Loan
Here are a few things to note as you shop around and compare personal loans.
Annual percentage rates include interest rates and fees so you can accurately compare various offers.
Repayment terms vary widely, and often you can set the length of your loan term repayment obligation. Going with a shorter term means you’ll pay less interest, while a longer term will result in lower monthly payments but a higher overall cost for the personal loan. You get the flexibility you need based on your current and anticipated financial situation.
Go through prequalification, which will let you check your estimated interest rate. Lenders will do a soft check on your credit when you prequalify, which won’t affect your credit score, meaning you can shop several lenders and compare rates and terms with no adverse impacts enabling you to easily find the lowest interest rates.
If you belong to a credit union, check with them about your eligibility for low-interest personal loans or related financial products. Credit unions often have lower rates than other financial institutions. Online lenders are sometimes good loan options as well.
Determining the amount you need in advance will help you narrow down lenders specializing in the dollar amount of the personal loan you want.
You can also benefit from autopay discounts, unemployment protection, or financial coaching, contributing to your bottom-line financial health.
Ask about late fees, insufficient funds fees, and prepayment fees, which are penalties for paying off your loan early. All of these can quietly drive up the cost of a personal loan.
If you’re flexible when taking out a personal loan (i.e., for a future home improvement project), do what you can to increase your credit score and DTI ratio.
If you have a low FICO score, you can always get a personal loan with a co-signer who will add their financial good standing as a guarantee to back you up as a worthy loan applicant.