What Is The Average Interest Rate For A Personal Loan?
When it comes to financing arrangements, one method that is steadily growing in popularity is personal loans. This is quite understandable given that the interest rate for this financing type is comparatively lower than ordinary credit cards.
Keep reading to learn more about the average rates of a personal loan.
Average Rates Per Credit Score Category
A borrower’s credit score is one of the key factors that influences the rates offered by banks and other lenders. Depending on the FICO score, their average rate fluctuates. Here are some general averages pulled from 2020 data compiled by Bankrate to give you a better feel for possible ranges that depend on credit scores.
- Poor Credit(300-629): This is the lowest creditworthiness category for borrowers applying for personal loans. For these individuals, APR rates are the highest, averaging between 28.5%–32.0%.
- Ok Credit (630-689): Those borrowers who exhibit slightly better credit have to work with interest rates averaging between 17.8%–19.9%.
- Good Credit (690-719): This category deals with those individuals who have a satisfactory income and relatively good credit history. Thus, their rates average between 13.5%–15.5%.
- Very Good To Excellent Credit (720-850): These individuals enjoy the lowest average rates which range between 10.3%–12.5%.
Average Rates Per Lender Category
Banks, credit unions, and online lenders are the primary underwriters of personal loans. Although they are quite helpful when it comes to providing monetary assistance, the average interest rate on loans in the US may vary significantly, even for borrowers with similar creditworthiness. Most lenders offer differing rates for customers and some of these circumstances are worth highlighting.
- Banks - There are many banks which provide personal loans and their interest rate varies depending on their underwriting requirements and other criteria. However, the rates on average range from 6% to 24%.
- Credit Unions - Credit Unions may be more flexible than banks in terms of borrower creditworthiness and eligibility criteria, but still have their own qualification rules. Borrowers who apply for the typical personal loan amounts can access interest rates starting from at 7% that can reach as high as 18%.
- Online Lenders - These alternatives to institutional lenders charge rates that range between 4% to 35% depending on a borrower’s qualifications and creditworthiness.
How To Get A Good Interest Rate?
Your credit score is the primary criteria that dictates the rates and terms of any loan offer. If you have a good credit score, you’ll likely receive quicker approvals and competitive rates. However, if your history is weaker, you may have to settle for much higher APRs depending on the loan amount and duration.
However, these following factors can improve your chances of approval:
- Credit Score - The first thing that you should do to obtain better rates is to improve your credit score. This is the primary factor dictating rates, making it pivotal to check your credit report regularly and work on improving your score before you apply for any financing.
- Fees - Some fees like the origination fees can affect the loan amount and increase your rate. Thus, keep an eye on these extra fees.
- Lenders - Compare offers from various lenders before making the final decision. Ask for quotes from multiple sources - banks, credit unions, and online lenders to cross-check the rates offered. This will help you to select the best deal and potentially negotiate even better rates.
What Else Can Affect The Interest Rate?
The interest rates offered to a borrower fluctuate based on multiple reasons other than those mentioned above. Here are some additional points that you must consider:
- Your Monthly Income - Some lenders set a minimum income amount as a criteria that contributes to the rates offered. If you have a delinquency or loan discharge marked on your report, you might not be approved for a personal loan. Hence, before you apply check the FAQs page of the lender for more clarity on eligibility.
- The Debt-To-Income Ratio - This ratio helps lenders assess the balance of your debts and income. If you have a higher debt-to-income ratio, you might not be approved for a loan. In case, you are approved, the lender might charge a higher rate than normal. Check your credit history to determine your DTI-ratio. Typically, a ratio under 40% ensures competitive rates.
- Your Employment - Most lenders also review your employment status before quoting rates and terms. If you have a stable job, it is much easier to obtain lower rates.
Overall, accessing the best interest rates on an average personal loan amount depends on many factors related to borrower creditworthiness. If you pay close attention to the different lender offers, you’ll likely notice some differences. Accordingly, it is a good idea to compare offers and select the most affordable option.
Before applying for a personal loan, be sure to review your credit report and verify your debt-to-income ratio. Additionally, speak with the lender to clarify if there are additional fees and/or loan processing charges. Finally, use an online calculator to get a rough estimate of the actual loan cost before signing any agreement.