What Is the Average Personal Loan Interest Rate (and Why It Matters)?

When you're trying to consolidate debt, cover unexpected expenses, or borrow money for a large purchase, a personal loan may be your go-to option. And naturally, one of the most crucial factors to consider when taking out a personal loan is the interest rate. Currently, the average personal loan interest rate hovers around 12% to 13%. However, it's important to note that this figure is just a benchmark, and individual rates can vary widely based on several factors. Let's take a look at the state of personal loan rates right now, and what you can do to get the best possible rate for your financial situation.

How personal loans work

Personal loans are typically unsecured loans, meaning they don't require collateral. Borrowers receive a lump sum of money from a lender and agree to repay it over a set period, usually in fixed monthly installments. The interest rate on the loan determines how much you'll pay in addition to the principal amount borrowed.

Why interest rates matter

The interest rate on your personal loan has a substantial impact on the overall cost of borrowing. Even a small difference in interest rates can translate to hundreds or thousands of dollars over the life of the loan. For example, on a $10,000 loan with a three-year term:

• At 10% APR, you'd pay $1,616 in total interest

• At 13% APR, you'd pay $2,135 in total interest

That's a difference of $519-aka, no small change. A higher interest rate means you'll pay more in interest over the life of the loan, potentially adding thousands of dollars to the total amount repaid.

Ideal interest rates

While the average rate is around 12-13%, the ideal interest rate for a personal loan is as low as you can get. According to debt attorney Leslie Tayne,the best signature loan rates today can be found for as low as 5% to 6%, though many lenders start their rates around 7% to 9%. Tayne says these rates are reserved for the most creditworthy borrowers or those with very good" credit scores of around 740 and up. "These borrowers have demonstrated past behaviors that indicate they are low-risk," Tayne explains. "They generally pay their bills on time, maintain low debt balances, and don't rely too heavily on credit."

At the other end of the spectrum, borrowers with poor credit can expect to pay upwards of 30% for an unsecured personal loan. These borrowers have had issues with missed payments in the past and even collections or bankruptcies. "Because of these past problems managing debt," Tayne says, "they present a high level of risk for lenders and face subprime interest rates." Generally, any rate below the average could be considered good, especially if it's lower than the interest rates on your existing debts.

How to secure a personal loan

The application process for a personal loan is a little more involved than simply strolling into your bank and asking to borrow money, especially without pledging any collateral. Lenders will check your credit report, credit score, income, employment status, outstanding debts, and overall financial situation before deciding whether to approve you for a loan and at what interest rate.

The most common sources for unsecured personal loans include banks, credit unions, and online lenders. Many allow you to begin the process by submitting an application online or over the phone. You'll need to provide information like your name, contact details, social security number, income, desired loan amount, and what you plan to use the funds for. The lender will then pull your credit report and other financial details before letting you know if you're approved or denied.

Tips for getting the best loan rate

1. Check and improve your credit score: Your credit score is one of the primary factors lenders consider. Pay bills on time, reduce credit card balances, and correct any errors on your credit report.

2. Shop around: Don't settle for the first offer. Compare rates from multiple lenders, including banks, credit unions, and online lenders.

3. Consider a secured loan: If you're struggling to qualify for a low rate on an unsecured loan, a secured loan (using an asset as collateral) might offer better terms.

4. Get a co-signer: A co-signer with excellent credit could help you qualify for a lower rate.

5. Opt for a shorter loan term: Shorter terms often come with lower interest rates, though your monthly payments will be higher.

6. Improve your debt-to-income ratio: Pay down existing debts and avoid taking on new ones before applying for a loan.

7. Demonstrate stable income: Lenders favor borrowers with steady, reliable income sources.

8. Look for rate discounts: Some lenders offer discounts to hold onto existing customers.

Understanding personal loan interest rates and how they impact your borrowing costs is crucial for making informed financial decisions. By focusing on improving your creditworthiness and shopping diligently for the best rates, you can save a solid chunk of change over the life of your loan.