What Is a Good Interest Rate on a Personal Loan? (2024 Guide) (2024)

Interest rates on personal loans are a percentage of the principal loan amount that the borrower must pay in exchange for the capital they receive. These rates are an essential part of the economy and compensate lenders for their services and the risk they are taking by lending money. They also have a major impact on the total cost of borrowing. Higher interest rates will increase your monthly payments and the cost of borrowing while lower interest rates will lower both your monthly payments and the total cost of the loan.

Your ability to qualify for a good interest rate affects both your monthly payment and the total cost of the loan. Personal loan interest rates vary depending on your income, credit history, debt-to-income (DTI) ratio, credit score, economic factors and more. Interest rates can also vary greatly from lender to lender, each carrying its own qualifications, risk assessments and terms.

Your credit score and history, the loan amount and term, economic conditions, inflation and the lender’s policies and risk assessment all influence what interest rate you qualify for.

Credit Score and History

Your credit score demonstrates your ability to pay your debts on time and therefore, is one of the most important factors of qualifying for the best interest rates. Credit scores are calculated by:

• Payment history (35%)
• Credit utilization (30%)
• Credit history (15%)
• Credit use (10%)
• New credit (10%)

Because payment history and credit utilization pull the most weight in your credit score, it’s important to place heavy emphasis on them. Making on-time payments every month and keeping your credit utilization low can help you move your credit score in a positive direction.

For reference, credit scores are typically broken into five categories, based on a FICO credit calculation.

Why Credit History Matters

Other factors still play important roles and can move your credit score up or down. For example, if you only have a three-year credit history and open a new line of credit every year, your average history of credit is much lower and less reliable to gauge than someone with a credit history of 10 years with their newest line of credit being four years old. A longer credit history allows lenders to see how consistently you pay back your debt and if you miss payments, both of which can increase or decrease your credit score.

Loan Amount and Term

How much you borrow is a large factor in a lender’s risk assessment. Larger loan amounts and longer terms typically have higher interest rates while lower loan amounts and shorter terms typically have lower interest rates.

As you can see, the interest rate you secure can drastically affect how much you’ll owe over the course of the loan term. You can do your own calculations with online calculators and change the variables to help you make an informed decision.

Economic Conditions and Inflation

The Federal Reserve changes interest rates to reflect the current supply and demand of the economy — borrowers’ usage of credit drives the economy with the way they spend, borrow and repay their debts.

Inflation affects how interest rates move because the dollar doesn’t have as much weight during times of high inflation. Inflation decreases the purchasing power of the dollar so it takes more of the lender’s money for the borrower to do what they want/need with the borrowed money.

Inflation and interest rates tend to move in the same direction, higher interest rates are a response to rising inflation. And when inflation begins to fall, interest rates tend to come down to stimulate the economy.

Lender’s Policies and Risk Assessment

Lender’s policies influence what interest rates are available to you because they are the ones taking on the risk. Lenders may offer excellent interest rates but only to those who have the best credit scores and highest income levels. A higher-risk borrower may be offered higher interest rates and be charged a plethora of fees in order to offset the lender’s risk. Sometimes lenders will offer better rates if there is some sort of collateral involved to compensate for their risk.

Origination fees, prepayment penalties and missed payment fees should all be evaluated when learning about the lender’s policies. These fees can add hundreds to thousands of dollars to your loan and need to be considered when choosing the best personal loan lender for your needs.

Personal loan lenders use your creditworthiness, economic conditions, loan amount and terms to set their interest rates. This complex risk assessment allows lenders to increase their profitability and carefully mitigate risk by evaluating how likely borrowers are to pay back their debt on time.

If a borrower has a strong credit history, lenders can lower their interest rate because the risk of default is decreased. If a borrower has a history of missed payments and high debt utilization, the lender will compensate by charging a higher interest rate in case of default.

Securing a low interest rate on a personal loan can save you thousands of dollars over the life of your loan and potentially increase the speed at which you pay off your debt. There are numerous steps you can take to secure a favorable interest rate, such as:

• Improving your credit score: If you have excellent credit — above 740, according to FICO standards — then you’re in a good spot to apply for a personal loan and most likely will qualify for the best rates. If you have a low credit score or a poor credit history, you can work to improve your score by making on-time payments on your current debts, paying down your credit card debt and keeping your longest credit accounts open.
• Adding a cosigner: While you’re trying to improve your credit score, you might consider asking someone you trust to be a co-signer. A co-signer with a good credit score — usually above 670 — can help you secure a more favorable interest rate.
• Comparing rates and terms from multiple lenders: You can get prequalified for a loan with multiple lenders without negatively affecting your credit score, allowing you to comprehensively compare each lender. For example, one lender may have a low interest rate, but charge copious fees — it’s important to evaluate all parts of the loan.
• Considering secured vs. unsecured loans: Secured personal loans are attached to collateral — your house, savings account or car — and can come with lower interest rates. Unsecured loans, however, have no collateral attached to them and typically come with higher interest rates.
• Negotiating with lenders based on your creditworthiness: Sometimes lenders will be open to negotiation. If you have a strong case for why you are a reliable and trustworthy lender, don’t be afraid to ask for a more favorable interest rate. Honesty and open communication can go a long way.

Interest rates help lenders mitigate their risk and increase their profits, and depend largely on economic factors. A good interest rate on a personal loan will vary depending on what you’re able to qualify for. Borrowers with a strong credit history who have proven to be responsible with credit will qualify for more favorable terms, rates and loan options than those with a poor credit rating.

Interest rates can significantly impact how much money you end up paying over the lifetime of your loan, so carefully consider your creditworthiness and shop around with different lenders before applying for a personal loan. Loan terms can play an equally important role in determining which personal loan is best for you.

Increasing your financial literacy and knowledge can help you make an informed decision when choosing a personal loan. Apply the knowledge you’ve gained to get the best personal loan interest rate available to you.