What is a Good Interest Rate for a Personal Loan? What You Need to Know

Personal loans are something that we all have to take out at one time or another. They're important for finishing our education, purchasing cars, or making any other big purchase that might take months or years to save up for. But personal loans always come saddled with something called the interest rate. Oftentimes, a good interest rate can make a personal loan easy to repay without taking too much out of your bank account in the long run. But a bad interest rate can accidentally make you pay much more than you originally intended. Let’s break down what constitutes a good interest rate for a personal loan now. 

What is a Loan Interest Rate? 

An interest rate for any loan can best be thought of as the price you pay for taking out a loan in the first place. In a nutshell, the interest rate for a loan is the percentage of the remaining loan cost that is added to the loan at the end of each month. For example, a fixed-rate loan for $500 with an interest rate of $5 per month will cost $505 after the first month, assuming you don't pay off any of the loan by 30 days. Thus, the interest rate for a personal loan can ultimately affect whether it’s a good loan for your needs and income level. In general, a lower interest rate is almost always better since it means you’ll pay less in the long run for the loan overall. Personal loans interest rates are often quantified as APR or annual percentage rate.

Factors That Affect Personal Loan Interest Rates

Of course, personal loans come with a wide variety of interest rates that are affected by several factors. Here are some of the major ones to keep in mind.

Credit Score

Your credit score can affect the types of personal loans you will qualify for, as well as their average interest rates. Your credit score is a measure of how creditworthy or trustworthy you are for a loan, and it's calculated by all kinds of separate factors including:

• How many credit accounts you have open
• Your credit payment history
• The percentage of on-time payments you have made
• Average age of your accounts

The better your credit score , the better personal loans you will usually qualify for. There are three credit bureaus in total (Experian, Equifax, and TransUnion). But between all three, credit scores are broadly broken down into a few major brackets:

• Excellent credit score: 720-850. Average personal loan APR: 5%-12%
• Good credit score: 680-719. Average personal loan APR: 13.5%-15.5%
• Average/Fair credit score: 640-679. Average personal loan APR: 17.8%-19.9%
• Poor credit score: 300-639. Average personal loan APR: 20%-36%

As you can see, there’s quite a difference in the interest rates you might expect if you have excellent credit compared to poor credit.

Loan Type/Duration

The loan type and duration can also affect your average personal loan interest rates. Fixed-rate loans often have slightly higher interest rates compared to variable-rate loans, but they are more reliable. That's because variable-rate loans, as their name suggests, might incur different (and sometimes higher) APRs throughout the loan's duration. Furthermore, what the loan is for can affect its average interest rate. Car loans usually have higher APRs compared to mortgage loans since the banks or lenders in charge of giving out loans know that it takes longer to pay off the house than it does to pay off a car. Therefore, they can still make a profit by charging a lower APR for a house than by charging the same APR for a car. Similarly, payday loans or other loans targeted toward low-income individuals or folks with poor credit often have abnormally high APRs. That's because the lenders in charge of these loans try to prey on people who have no choice but to accept subpar loan conditions.

Debt-to-Income Ratio

Your debt-to-income ratio or DTI will affect both your credit and the interest rate you may receive when you qualify for a personal loan. The lower your DTI is, the less that you have relative to your regular income level, and the more likely you will be to pay off any future loan. Banks and lenders love lower DTIs, so they may reward you with better APRs.

Loan Provider

Naturally, the loan provider will make a big difference as well. Some lenders, like Seek Capital , offer excellent small business loans with generally low rates in an attempt to make business easy for business owners. Other lenders may not have such generous offers and may only have loans with relatively exorbitant interest rates.

What’s the Average Interest Rate for Personal Loans?

The average personal loan interest rate will vary according to your source. However, according to Experian (which is, remember, one of the big three credit bureaus), the average personal loan interest rate was 9.41% as of 2019 . This being said, the same organization also noted that personal loan interest rates typically range from as low as 6% to as high as 36%. It all depends on the provider, the loan in question, and other factors.

So What Constitutes a “Good” Interest Rate for Personal Loans?

Now that you know what interest rates are and what the average is, what counts as a good interest rate for any future personal loan? The answer is simple: as low as you can make it! Taking the information above, it’s not necessarily bad to take out a personal loan with an interest rate between 8% and 10%. That’s about average for the industry regardless of what the loan is for or the provider. However, you can potentially get loans with interest rates as low as 6% (or possibly even lower depending on the loan. Some housing loans go as low as 3%!). The lower your interest rate, the less you’ll pay over the loan’s term, which means you’ll pay less for the overall loan by the end of the repayment period.

Are Low Loans Always Better?

Unfortunately, no. In fact, some loans attract borrowers by having abnormally low APRs (such as 1% or 2%). In exchange, they may require extremely high down payments if the loan is meant to cover a really pricey item, like a car or house. In other cases, the loan might be attached to crazy fees, like late fees, early payment fees, and more. These are traps designed to draw in borrowers who don’t read contracts fully or who don’t read the fine print. Then they end up stuck with a subpar loan even if the APR is really low on the surface. Still more loans might have extremely short repayment periods. For instance, maybe you take out a loan for $10,000 with a low APR of 3%. The only trouble is that the loan’s contract specifications state that you must repay the loan in full in just three months. If you don’t, you’ll face a much higher APR of 25%! Furthermore, be aware of variable rate personal loans that seem to have really low APR limits, like 1%. Chances are you’ll end up having to pay a much higher APR at some point over the loan’s term, such as 10% or even higher. The bottom line is this: Be sure to read everything about a personal loan before signing on the dotted line. The APR is not the only important factor to consider.

How to Compare Loans

Alongside APR, you should compare personal loans by looking at the following major factors:

• Loan term – this is how long you have to repay the loan, which may also be quantified by the number of payments you’ll need to make. Shorter loan terms usually lead to cheaper APRs and vice versa.
• Discounts – some loans come with discounts baked in, either to draw in new borrowers or as a reward for sticking with a given financial institution.
• Monthly payment amount – the amount you'll need to pay each month to pay off the loan by the above-specified term limit.
• Fees – as mentioned, some loans come packed with extra fees, like late fees or prepayment fees (which are extra charges that accrue if you try to pay off your loan early).

Summary

All in all, a good interest rate for a personal loan is generally the lowest rate you can find. However, you need to be careful to examine all the facets of a given loan before actually agreeing to one. Some loans have really low interest rates but include extra charges or fees that may end up costing you more in the long run. In general, a good idea to target personal loan interest rates between 6% and 10% if you can find them. If you’re looking for a personal loan to get your business idea up and running, we can help you find the perfect business loan for your needs right here at Seek Capital, complete with low APRs. Be sure to contact us today to check out our business loans and to ask us about other financial insights! Sources https://www.experian.com/blogs/ask-experian/research/personal-loan-study/ https://www.investopedia.com/terms/c/credit_score.asp https://www.investopedia.com/terms/i/interestrate.asp