How to Find the Best Personal Loan Interest Rates

Because personal loan interest rate offers can vary significantly, shopping around for the best personal loan interest rate can save you real money in interest charges.

 
According to the U.S. Federal Reserve, the average personal loan interest rate as of May 2021 was 9.58%.² But that may not be a very useful benchmark since the rates can vary significantly – perhaps most notably by credit score. In an analysis of its own 2018 data, online lending platform Lending Tree reported that the average personal loan interest rates offered to borrowers with the highest credit scores (760+) ranged from 7.55% to 16.38%, while the average interest rates offered to those with the lowest scores in the analysis (640-679) ranged from 24.46% to 33.01%.³ Because this is a 2018 analysis, the exact percentages have likely changed by now – but the difference in rates between high and low credit scores is likely to remain consistent over time.

  
The Lending Tree analysis showed that the best personal loan interest rates found by borrowers receiving multiple offers were 35% lower than the highest received by the same borrowers. That translates into an average savings of $1,701 over three years for an approximately $10,000 loan. And as borrowing amounts and loan lengths increase, the cost differences become even larger.

That analysis underlines the importance of shopping around for the best personal loan interest rate. Here’s how experts suggest you do it. 

Lenders usually view people with higher credit scores as lower risks and, therefore, worthy of lower personal loan interest rates and better terms. You’re entitled to free annual credit reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com. Before you apply for a personal loan, check your credit reports carefully and dispute any errors that might damage your scores. This is one of the steps that requires upfront planning because it generally takes the credit bureaus about 30 days to respond to dispute requests. For more information, read “How to Dispute Your Credit Report at All 3 Bureaus.”

You may also be able to improve your credit score by reducing the percentage of your available credit that you’re using – in other words, paying down your credit card and other debt balances. You may also want to see whether your issuer will increase your credit limit, which could have the same effect. Again, it will usually take at least a month or two before such actions translate into a change in your score.

When you decide to seek a personal loan, experts suggest starting with your bank: It already has a relationship with you, knows more about your financial behavior, and might see value in offering you more products and services. That might convince it to offer you a better personal loan rate. If possible, include at least one local nonprofit credit union that you qualify to join, as credit unions often offer highly competitive personal loan rates. Then, consider an online lending marketplace that provides offers from multiple lenders, simplifying comparison shopping.

 
Keep predatory lenders off your list. As the Better Business Bureau reports, “Offers you see online that say ‘No one is turned down due to credit’ are invariably scams.” You can sometimes get insights about which lenders might be right for you by reviewing ratings from the BBB, U.S. News & World Report, or J.D. Power.⁴

Online lenders have helped to improve the personal loan application process, making it faster and more convenient and leading other lenders to do the same. You’ll want to have key information on hand to apply for your personal loan, including:

• Your income, and documents that verify it.
• Your monthly mortgage or rent.
• Other debt and savings account information.
• Identity and address verification.
• And your Social Security number – of course!

Experts recommend prequalifying before you officially apply. Prequalification gets you a sense of the loan amounts and interest rates lenders are willing to offer without affecting your credit score because pre-qualification inquiries are considered “soft,” not “hard.” Hard inquiries can lower scores by a small percent, while soft inquiries have no effect. 

To help consumers compare personal loan rates, the federal government requires lenders to include an annual percentage rate (APR). APR is the actual yearly cost of funds over the course of your loan, including upfront and other fees. If a loan has no fees, the APR should match the reported personal loan interest rate; the higher the fees, the more the two numbers will differ. While not perfect – they don’t include optional costs, such as late fees – APRs enable “apples-to-apples” comparison and so are the most practical way to compare personal loan rates. For more on APRs, read “What Is APR and How to Calculate It.”

Don’t stop with APR: Loan terms can also be important. For example:

• Are you being offered a variable APR that starts low but could rise? If so, how much could it increase?
• Can you repay early without penalty?
• Does the lender subtract origination and other fees from the proceeds upfront, meaning that you get a smaller check from it?

If you’re not comfortable with lenders’ offers, you have a few options. One is to request a secured loan where the lender can seize property if you don’t pay and might then offer a lower personal interest rate. To learn more, read “Is a Secured or Unsecured Personal Loan Right for You?” Another option is to find a cosigner with strong credit who’ll promise payment if you fail to pay. Or you might seek a smaller loan, potentially making you a lower risk.

Personal loan interest rates can differ widely, so it’s crucial to plan and shop around. Doing so could potentially save you thousands of dollars in interest charges over the life of the loan.