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As of Q3 of 2023, Americans held a total of $241 billion in unsecured personal loan balances, marking a 14.8% increase from the $210 billion balance in Q3 of 2022.
The Federal Reserve elected to hold the current interest rates steady for the third consecutive time in late 2023 in accordance with the diminishing inflation rate and increased stability of the U.S. economy. Committee members also planned for at least three rate cuts in 2024, a more aggressive approach than the committee had previously indicated.
Should I Get a Personal Loan?
Personal loans can be an attractive credit option for many borrowers, especially if the proposed 2024 rate cuts come to fruition. If you need cash quickly, you can usually get funded within a couple of days of approval. In many cases, personal loans can also be used to consolidate and pay off costly credit card debt.
This type of funding usually makes more sense if you have a good credit score, as that can significantly impact your personal loan interest rate. However, not everyone should get a personal loan.
It’s often best to stay away from this type of financing unless you have a specific and viable purpose for the funds other than wanting to have additional cash on hand. Personal loans may not be a good idea for those who lack spending discipline or the flexibility in their budget to afford monthly loan payments.
What is a Good Interest Rate on a Personal Loan?
According to the Federal Reserve, the average interest rate on a 24-month personal loan was 12.35% as of November 2023. In comparison, the average APR for credit cards was 21.47% across all accounts in the same month.
Up-to-date data on interest rate averages can serve as a useful benchmark when evaluating what is a good interest rate on a personal loan. However, a variety of factors can impact your interest rate, and a “good” interest rate on a personal loan may look different depending on your financial situation.
What Factors Determine Your Personal Loan Interest Rate?
A variety of factors can impact the interest rate offer you receive on a personal loan. For example, things like steady employment history and secure sources of income can be a green flag in the eyes of your lender.
Here are some of the major factors that can impact your personal loan interest rate:
Credit Score
One of the most critical factors that can impact your available interest rates is your credit score. This is a huge indicator of your overall credit history and allows lenders to discover any past blemishes on your credit.
If your credit score is below 500, you are unlikely to qualify for a personal loan regardless of its interest rate. The best personal loans with the most competitive rates are reserved for those with excellent credit scores, particularly in the 720 to 850 range. Borrowers with lower credit scores, or those who just barely meet their lender’s minimum credit score requirements, won’t get the best personal loan rates and offers and in some cases, may not be approved at all.
Debt-to-Income Ratio
Another important factor is your debt-to-income (DTI) ratio. Your DTI gives lenders a clearer picture of your current debt and income by comparing your debt payments to your monthly gross income, which is how much you earn each month before taxes and other deductions.
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.
Credit Utilization
Your credit utilization can also impact your interest rate when qualifying for a personal loan. This measures your total available credit vs. how much credit you’ve used. A low utilization rate across all of your credit instruments and on individual accounts is generally better for your score.
If your utilization 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 to qualify for a competitive interest rate.
How to Get a Good Interest Rate on a Personal Loan
There are a few key factors to consider as you compare personal loan offers. Aside from your base interest rate, it’s helpful to compare the annual percentage rate, or APR, across loan options. The APR includes interest rates and annual fees on the loan to provide a more accurate comparison.
Repayment terms can vary widely, and you can often set the length of your loan term and repayment obligation. 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.
With these considerations in mind, here are a few steps you can take to improve your chances of securing a good interest rate on a personal loan:
- Know your needs: Determining your desired loan amount in advance will help you narrow down your lender options. Being prepared with knowledge of your financial needs may also help you find a lender that specializes in certain aspects relating to your financial circumstances.
- Compare financial institutions: Some types of lenders may offer better rates than others. If you belong to a credit union, check with them about your eligibility for low-interest personal loans or related financial products. Online lenders can be a good loan option as well.
- Get prequalified: Going through prequalification will give you an idea of your estimated interest rate. Lenders will do a soft check on your credit when you prequalify, which won’t affect your credit score. This means you can shop with several lenders and compare rates with no adverse impacts.
- Research discounts: You can also benefit from autopay discounts, unemployment protection or financial coaching, contributing to your bottom-line financial health.
- Ask about fees: Ask about late fees, insufficient funds fees and prepayment fees. All of these can quietly drive up the cost of a personal loan.
- Improve your financial standings: If you’re flexible when taking out a personal loan, do what you can in the meantime to increase your credit score and DTI ratio.
- Find a co-signer: If you have a low FICO score, consider finding a co-signer who will add their financial good standing as a guarantee to back you up as a worthy loan applicant.