National average personal loan interest rates have risen in recent years as the Federal Reserve tightens its monetary policy in response to rampant inflation. But while the Fed does influence interest rates on many borrowing products, including personal loans, you have more control over the rate you get than you might think.
Personal loan rates can vary greatly from one lender to the next, so it pays to shop around. Here’s how you can get a low rate on a personal loan, even in today’s rising rate environment.
How to Shop for a Better Personal Loan Rate
The personal loan interest rate you get depends on a number of factors, including your credit score and debt-to-income ratio, in addition to the lender and loan type you choose. Follow these steps to get the best possible rate for your situation.
Check and Improve Your Credit Score
Like credit cards, personal loans are typically unsecured, meaning they don’t require you to put up an asset as collateral. Lenders use your credit score to assess your repayment risk before issuing you a loan and setting the rate you ultimately pay.
Higher credit scores will result in lower interest rates on personal loans, and vice versa. It’s difficult to get a good rate on a personal loan with fair credit or worse, defined as a FICO score lower than 670. To get the lowest rates available, you should aim for a score of at least 700.
You may be able to find your credit score through your preferred banking app, and U.S. News offers free credit monitoring that won’t impact your credit score.
Tip: Any traditional personal loan lender will require a credit check to issue you a loan. If a lender doesn’t require a credit check, you may be offered a predatory installment loan at high interest rates, generally considered an APR of 36% or above. APR caps vary by state, so be sure to carefully read the loan’s terms to understand what you’re getting into.
Compare Offers From Multiple Lenders
Personal loan lenders each have their own pricing models, so it pays to shop around. Most — but not all — personal loan lenders let you get prequalified to check your estimated rate without hurting your credit score.
Get prequalified through different types of lenders, including online-only lenders and traditional banks. Credit unions offer some of the lowest personal loan interest rates available, with APRs capped at 18% for federally chartered credit unions. You should also check with your bank to see if they offer a relationship discount or favorable pricing for members.
Tip: Look beyond the interest rate when comparing personal loan offers. The loan’s annual percentage rate, or APR, includes the interest rate as well as any financing charges such as origination fees. The APR gives a more comprehensive look at the total cost of borrowing than the interest rate alone.
[Read: Best Low-Interest Personal Loans]
Weigh Different Repayment Terms
Personal loans can typically be repaid in three to five years, although some lenders offer longer terms for larger loan amounts.
Shorter repayment terms may come with lower interest rates but higher monthly payments due to the accelerated repayment schedule. Longer terms offer more affordable monthly payments, but they may come with higher interest rates and are usually more expensive to repay over time.
Get Help From a Creditworthy Cosigner
Some lenders allow you to borrow a personal loan with a cosigner, which can help increase your chances of approval and allow for better rates.
Keep in mind that a cosigner shares equal responsibility for repaying the loan, so be sure to have a plan in place if you lose your income stream and can’t make payments.
Enroll in Automatic Payments
Pretty much all major lenders offer an auto-pay discount that lowers your rate by a quarter-point if you set up automatic payment. In fact, many of the lowest advertised rates already include an auto-pay discount, so be prepared to enroll in automatic payments to take advantage of the best available loan pricing.
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Personal Loan Rates Are Back to 2024 Highs. Here?s How You Can Shop for a Better Deal. originally appeared on usnews.com
