When you take out a personal loan, you have to pay interest. As a result, it’s in your best interest to get the best personal loan interest rate possible. At this point, you might be wondering “What is a good interest rate for a personal loan?” Or at least, “What is the average personal loan rate?”
Generally, the rate you’ll receive will vary depending on your credit score, income, the amount borrowed, and loan repayment term. Still, there are some industry averages you can use to compare personal loans.
Here’s how to find out whether the loan interest rate you’re offered is a good interest rate.
What is a good personal loan interest rate?
Experian put the average personal loan annual percentage rate (APR) at 9.41% in 2019, while the New York Federal Reserve puts the average personal loan interest rate at 9.34% for the third quarter of 2020 on a 24-month loan.
But your financial history influences the rate you’re approved for, so might get approved for loans above or below the average interest rate. How do you know if the interest rate you’re offering is good for you?
A good personal loan interest rate depends on your credit score:
- 740 and above: Below 8% (look for loans for excellent credit)
- 670 to 739: Around 14% (look for loans for good credit)
- 580 to 669: Around 18% (look for loans for fair credit)
- Below 579: Around 30% (look for loans for bad credit)
For a guide to finding the right loan for your credit score, check out our page on credit scores and personal loans.
Finding a good interest rate for a debt consolidation loan
When looking for a good interest rate for a debt consolidation loan, an additional question to ask is “Is this a lower rate than the rate on my credit cards?” In general, personal loan interest rates are lower than credit card interest rates — but it’s always good to double-check any specific loans you’re considering.
What affects your personal loan interest rate?
Your own personal situation when you apply for a loan, the details of the loan you’re applying for, and the lender you’ve chosen will all affect the interest rates you’re offered. Some of the key factors that can impact your loan rate include:
- Your credit score. As mentioned above, people with higher credit scores should qualify for loans at better rates. If you have a credit score of 750, a 36% interest rate would be considered a higher interest rate — but if your score is 580, this would likely be a very good interest rate based on your credit history.
- Your income and employment. You’ll need proof of solid employment and a high enough income to convince a lender you can pay back the money you’re borrowing. If you don’t have those two things, you’ll only be offered loans at very high rates — if at all.
- Whether the loan is a fixed or variable interest rate loan. Fixed rates don’t change over time. With a fixed-rate loan, you’ll always have the same monthly payment and the same interest rate. Variable rates, on the other hand, can go up and down over time. The personal loan interest rate on variable rate loans usually starts lower than that of a fixed rate loan — so a variable-rate loan might look like a better deal, but its interest rate can go up over time. If you’re looking at two different loans with the same rates but one is fixed and the other is variable, the fixed rate loan is almost always the better deal because you’ll have the certainty of knowing it won’t go any higher.
- Whether it’s a secured or unsecured loan. If you take out a secured personal loan, you use an asset, such as your home or car, as collateral. Most personal loans are unsecured, which means you do not need to put up any collateral.
- Your repayment timeline. If you borrow money over a longer period of time, there’s more risk to the lender, so interest rates are naturally higher. A loan with a short repayment timeline should have a lower rate than one with a long loan repayment period.
- The amount you’re borrowing. Bigger loans sometimes present more risk to lenders, so rates could be higher.
As you can see, one reason there’s so much variation in what’s considered a good personal loan interest rate. Every borrower is different — and your favorite lender might offer a more or less favorable loan term than competitors. That’s why it’s always a good idea to compare multiple personal loan lenders.
How to compare interest rates
Comparing the personal loan interest rate you’re being offered with the average loan rate is the first step to getting an idea of where you stand.
But since rates can vary wildly depending on your credit profile, the best thing to do is to compare rates from at least three lenders. Ideally, look at a mix of different kinds of lenders to get the full picture. Check with your local credit union or bank in addition to an online lender or two (or three). By doing this comparison, you can see whether the rates are all similar or if any stand out as particularly high or particularly low. Just be sure to check all the costs and fees associated with each loan, like the origination fee or prepayment penalty.
When comparing loan rates to see if a personal loan is offering a good rate or not, compare the APRs to get the whole picture. The APR tells you the full cost of a loan, including the interest rate and fees. Also, be careful to compare loans with the same term (compare 5-year loans to other 5-year loans) and interest rate type (compare fixed-rate loans to other fixed-rate loans).
Finding the lowest interest rate for your personal loan
Some lenders offer loans at rates lower than 6%. If you’re looking for a loan with a lower interest rate, you can find some of the top-rated low-interest loans on our list of the best low-interest personal loans.
What to do if you’re not offered a good personal loan interest rate
If you’re only being offered personal loans at very high rates — above the national average rates — you need to consider why.
Your priority should be to find out if there’s something in your borrower profile that is a red flag for lenders, such as a low credit score or insufficient income. If that’s the problem, you either need to improve your credit or earn more income — or get a cosigner to vouch for you. If you have bad credit, for example, you can get a much better rate if the cosigner has a high credit score.
You can also get a lower rate by putting up collateral, like a bank account or vehicle. A loan with collateral is called a secured loan (a loan without collateral is called an unsecured loan). Secured loans often have lower interest rates, but be careful: the lender can take your collateral if you miss a monthly payment.
If you’re a well-qualified borrower and aren’t being offered a loan at a good rate, you may simply need to shop around to see if another personal loan lender can offer a competitive rate. You can also consider borrowing for a shorter period of time or borrowing a bit less money so you present less of a risk.
The bottom line
What is a good interest rate for a personal loan? It’s the lowest rate you can get with your credit score and financial situation. The lower the rate you pay to borrow, the more you can save on your loan. If you’re a reasonably well-qualified borrower, always be sure to compare rates from different lenders and look for rates at or below the average. That way you won’t pay more than necessary for your personal loan.