Average personal loan interest rates

Personal loans are useful when you need funding fairly quickly, but the interest rates on personal loans vary widely. If you are applying for a large personal loan for expenses or using one to consolidate debt, you want to get the best rate possible to keep your interest costs manageable. As of this writing, the average rate for a personal loan ranges from 10% to 15% for those with good to excellent credit. Here’s what you need to know about the average rates for personal loans and how you can get the lowest rate possible.

Key insights

• Rates on personal loans can have a wide range.
• Your credit score is one of the most important factors in the interest rate you get.
• The annual percentage rate (APR) on a personal loan gives the most complete picture of the total cost of the loan.

What is a good interest rate on a personal loan?

Personal loan interest rates vary by the lender and loan type. Borrowers with excellent credit and adequate income can usually take advantage of lower interest rates.

Currently, the average rate on a personal loan ranges from 10% to 32%. The national average finance rate on a 24-month personal loan from a commercial bank is 10.16%, according to the Federal Reserve Bank of St. Louis. Borrowers with excellent credit, lower debt-to-income (DTI) ratios and sufficient income often qualify for lower rates. You may also pay a lower rate if your loan term is shorter or you borrow less money.

In general, a good interest rate falls at or below the average range for your credit score. Keep in mind that many factors (apart from your credit score) will affect your interest rate.

What affects interest rates on a personal loan?

Your financial situation has a big effect on your interest rate, and your credit score is among the most important factors. In most cases, you’ll need a credit score of at least 670 to qualify for a personal loan with a good rate.

Borrowers with very good and excellent credit (740 and above) are generally offered the lowest interest rates. Your credit score takes into account your payment history, credit utilization, length of credit history, credit mix and the number of credit inquiries.

If your DTI ratio is higher than 35% to 40%, you might not qualify for the best interest rate on a personal loan.

Besides your credit score, your lender will evaluate the following:

• Your income: If your income is on the higher end and is coupled with a higher credit score, you should be able to secure an interest rate on the low side. Your income level also determines how much you can borrow.
• Your DTI ratio: This shows how much of your gross monthly income goes toward paying debts. As a general rule, you want a DTI ratio of 35% to 40% or below to qualify. You could still qualify with a higher DTI ratio, but it may mean you’ll pay a higher rate.
• Your employment status: Lenders want to see a consistent source of income. This helps assure them that you won’t default on your loan.
• Your loan term: Term length and other loan terms also affect interest rates. Personal loan term lengths tend to vary from 12 to 60 months, and loans with longer terms usually have higher interest rates.
• Secured versus unsecured: Most personal loans are unsecured, which means they are not backed by collateral. Unsecured loans are riskier for lenders because there is no asset to sell to recover any losses if you default; this translates to higher rates for borrowers.

  Some lenders offer secured personal loans with lower rates; these loans are backed by a vehicle, a savings account or another form of personal property.

Even if you don’t perfectly meet all of these qualifications, you can still get approved for a personal loan. Ideally, you want to get the lowest rate possible so that you pay less for the loan.

Average rate for a personal loan by credit score

According to research by Bankrate, borrowers with very good to excellent credit (scores between 720 and 850) pay between 10.3% and 12.5%, on average, in interest. Those with bad and fair credit (scores between 300 and 629), on the other hand, pay much higher interest rates — between 28.5% and 32%, on average.

Even if you don’t have excellent credit, you can still secure a decent interest rate. If your credit score is between 690 and 719 (good), for instance, you can expect to find rates of 13.5% to 15.5%. If your credit score is average (between 630 and 689), your rate is likely to fall between 17.8% and 19.9%.

Small changes in your interest rate can significantly affect the amount of interest you’ll pay over the life of the loan. Say you have good credit and secure a $10,000 personal loan for three years at 15%: You’ll end up having paid $2,479.52 in total interest after your 36th payment.

However, if you comparison shop and find a loan with an interest rate of 14%, you could save about $175 in interest. If you have excellent credit and lock in an interest rate of 11%, you’ll only pay $1,785.94 in interest, saving close to $700.

Interest rate vs. APR

When shopping for a loan, you may see the terms interest rate and APR and think they are being used interchangeably — but there is a big difference. They both express the annual cost of credit as a percentage of the loan amount, but the interest rate only accounts for interest, while the APR adds in the cost of other loan fees.

For example, say you find a lender that will offer you a personal loan for $10,000 with a 10% interest rate for five years. However, there’s a 3% loan origination fee, which will cost you $300 upfront. You can use an online calculator to compute the APR. With the origination fee included, the APR (or the annual cost of credit) is really 11.324%.

As you’re comparing loans, looking at the APR instead of the interest rate gives you a better idea of the overall cost of the loan. While researching lenders, make sure you know whether the rate you’re seeing is the interest rate or the APR.

How to get a good interest rate

There are a few ways to secure a good interest rate. You might start by improving your credit, if necessary. A small increase in your credit score could seem insignificant, but it can make a big difference in the interest rate a lender offers you.

Also, you should comparison shop and weigh all your options. Look for trusted lenders with reasonable rates and loan terms that fit your budget. Many will show you which rates you qualify for with a soft credit check, which won’t affect your credit score. Make sure you gather quotes from various types of lenders, too, including national banks, credit unions, online lenders and small community banks, to find the right rate for you.

Avoid personal loans with rates that are on the high end of the rate spectrum. Lenders that charge excessive rates fall under the category of predatory lenders. High interest rates and expensive fees make it hard to repay the loan.

Bottom line

Interest rates depend on many factors, including the lender, the type of loan and the loan term. The most important factors for determining a rate, though, are your credit score and overall financial situation.

As you evaluate your options, you should compare loan APRs, which take into account the interest rate and additional fees and charges. Watch out for lenders with rates of more than 35.99% — this can be a sign of predatory lending. If you take the time to research loan offers before making your final decision, you can find a loan that’s right for you and saves you money.