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Low credit personal loans
What is the average interest rate on a personal loan?
In a Nutshell
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One size does not fit all when it comes to personal loan interest rates, which can vary wildly depending on the lender and your borrowing power.
In fact, the differences between a personal loan with a low rate, one that’s merely average and one that’s sky-high often come down to your credit history and credit scores. Generally, the higher your credit scores, the more likely you are to qualify for a loan with lower interest rates. And the lower your credit scores, the more likely you are to face higher interest rates.
Emergency costs? Debt payoff? Dream trip?
What is a personal loan?
A personal loan is a type of installment loan that you repay with interest in set monthly payments over the repayment period. You can generally use personal loan funds for just about anything, but lenders can have limitations. Common uses include debt consolidation, home improvements or repairs, credit card debt refinancing and emergency expenses.
An unsecured personal loan isn’t backed by any collateral, while a secured personal loan is backed by collateral, such as money in a savings account or a certificate of deposit. If you default on a secured loan, the lender may claim the asset to satisfy the debt.
You can find personal loans at many traditional banks, credit unions and some online lenders. There’s no single best source for personal loans, so it’s important to shop around to ensure you get the best terms for you.
What is an annual percentage rate (APR)?
How personal loan rates compare
Steve Allocca, president of Lending Club, points to two main factors that lenders may be looking at when deciding whether or not to lend you money: “your credit history and profile, and the type of credit or loan you’re looking for.”
If you’re buying a car, you may get a better rate with an auto loan than with a personal loan. But that same logic may not apply to a personal loan vs. a credit card. That’s because a credit card is a form of revolving credit. And if your card has a grace period, you won’t have to pay any interest on purchases as long as you are paying off your balance in full and on time each month.
How lenders set interest rates
As the name suggests, the risk-based pricing method tries to determine how much risk you as the borrower pose to the lender based on your credit scores and other factors. Lenders may use this method along with other information to determine your APR.
“If your application and credit history suggest you’re a lower credit risk,” says Allocca, “your personal loan offer will probably have a lower APR. If your application and credit history suggest you’re a higher credit risk, your offer will likely have a higher APR.”
Here’s an example of how credit scores can affect interest rates. According to FICO as of July 13, 2018, mortgage shoppers with FICO® credit scores in the 620–639 range (on a scale of 300 to 850) might qualify for a 30-year fixed $200,000 mortgage at an APR of 5.731%. Those with credit scores in the 760–850 range applying for the same mortgage could expect APRs around 4.142% for the same loan.
Which lenders offer low interest rates?
For example, according to a National Credit Union Administration study, the average interest rate for a fixed 36-month unsecured loan from a credit union as of March 2018 was 9.22% versus 10.09% for banks.
Credit unions are not-for-profit financial institutions. So any proceeds that a credit union might earn go toward providing better service for their members rather than to increase profits. Of course, in order to get a loan from a credit union, you’ll typically need to be a member of that union.
How to estimate your interest rate before you apply
- Date of birth
- Social Security
- Contact information
Once you submit the required information, the lender can run a soft credit check to get an idea of your credit history. If you’re prequalified, the lender may share an estimated interest rate and loan amount for your review.
If you like the estimated rate and amount, you can submit an application and the lender will run a hard credit check. This gives the lender a fuller picture of your creditworthiness. The lender will then determine whether or not to approve your application and, if approved, give you a final interest rate and loan amount.
It’s important to note that if approved your final interest rate and loan amount may be different than the estimates you got during the prequalification process. This can happen if the lender finds something through the hard credit check that changes how it views your creditworthiness.
How do soft and hard credit checks differ?
How do soft and hard credit checks differ?
A soft credit check typically occurs when an existing lender checks your credit, a prospective lender prescreens you for an offer, or when you pull your own credit. Soft credit checks don’t affect your credit scores.
Hard credit checks, on the other hand, happen when you apply for new credit. Many credit scoring models factor in how often you apply for credit. As a result, it can negatively affect your credit scores. Since lenders are often interested in knowing how recently or often you’ve applied for credit cards or loans, a hard credit check can be relevant to your creditworthiness.
Tips for getting the best possible interest rate on a personal loan
1. Check your credit scores
As we’ve already mentioned, the higher your credit scores, the better your chances of getting a lower interest rate. To get an idea of what lenders might see, check your TransUnion® and Equifax® credit scores for free on Credit Karma.
2. Pay down existing debt
One factor that lenders may consider when you apply for a personal loan is your debt-to-income ratio. DTI is generally calculated by adding up all your monthly debt obligations and dividing the sum by your monthly before-tax income.
“Your DTI is an indicator of your ability to reasonably take on — and pay off — more debt,” Allocca says.
If your DTI is high, you might be considered a risky borrower and offered a higher interest rate. So again, if you have time and it makes sense for you, consider paying down some of your existing debt, especially your credit card balances, before applying for a personal loan.
3. Shop around
Allocca recommends comparing yearly costs for different loan options by APR.
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