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Having excellent credit is key to getting a good interest rate on a personal loan. Find out how to achieve it. (Shutterstock)
Compared to credit cards, personal loans typically have lower interest rates. The average credit card interest rate in the first quarter of 2022 was 16.17%, compared to 9.41% for a 24-month personal loan, according to Federal Reserve data.
Having an excellent credit score is the best way to get the lowest available interest rates. Here’s how to lock in a good interest rate on a personal loan.
Visit Credible to see your prequalified personal loan interest rates from various lenders, all in one place.
Factors that affect your personal loan interest rate
A number of factors can affect the interest rate you get on a personal loan, including:
- Credit score — Your credit score is a three-digit number that helps lenders assess risk. It’s based on your payment history, credit mix, account length, and more. Credit scores typically range from 300 to 850, with a higher score being better.
- Debt-to-income ratio — Debt-to-income (DTI) ratio refers to all your monthly debt payments divided by your gross monthly income. A good rule of thumb is to keep your DTI ratio at 43% or lower.
- Employment history and income — Most lenders look at your past 24 months of employment to determine if you’ll have the means to repay your loan. They hope to see stable employment or a reliable source of income.
- Loan term and amount — Longer term loans and larger loan amounts typically come with higher rates than smaller, shorter-term loans. This is because longer and larger loans require lenders to take on more risk.
- Collateral — While personal loans are usually unsecured, you may be able to get a secured personal loan by providing collateral (something valuable you own). Since lenders can seize the collateral if you fail to make your payments, secured personal loans tend to have lower interest rates.
5 ways to improve your credit score
If you’re unhappy with your credit score, these strategies may help you improve it:
- Review your credit reports. Visit AnnualCreditReport.com to pull free copies of your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Review each report carefully and dispute any errors you find with the appropriate bureau.
- Pay your bills on time. Payment history has the largest effect on your credit score. That’s why it’s important to pay your mortgage, credit cards, car loans, student loans, and other bills on time, every time.
- Pay down debt. Your credit utilization ratio — or the amount of debt you owe compared to your available credit — will also affect your credit score. To lower your credit utilization and improve your score, do your best to pay down your debt.
- Don’t close older accounts. You might be tempted to close accounts that you no longer use. Since credit bureaus like to see an established credit history, you should leave your older accounts open.
- Avoid opening new accounts. Every time you apply for a credit card or loan, the lender may perform a hard inquiry, which can temporarily lower your credit score. For this reason, only apply for new credit when you absolutely need to.
How to get the best interest rate
To ensure you lock in the lowest interest rate on a personal loan, follow these steps:
- Improve your credit score. The higher your score, the easier it’ll be to strengthen your loan application and land a good interest rate.
- Shop around and compare lenders. Banks, credit unions, and online lenders offer personal loans. Not all personal loans are created equal, so do some research and explore all the options available to you. Compare the interest rates, terms, and fees of each loan you find so you can hone in on the ideal one for your needs.
- Apply with a cosigner. A cosigner with good credit can help you get an interest rate that you wouldn’t otherwise qualify for on your own. If your lender accepts cosigners, it’s well worth it to find one. Just make sure your cosigner understands that they’ll be responsible for your payments in the event you default.
If you’re ready to see what interest rates you might qualify for, visit Credible to quickly and easily compare personal loan rates.
