Personal Loans

Personal loan interest rates: What to know

By
Social Links for Credible Staff ,
edited by
Social Links for Jared Hughes
Updated Aug. 30, 2023, 9:54 a.m. ET
An older woman researches personal loan interest rates.
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The interest rate is the biggest determining factor for how much a personal loan costs. The higher your interest rate is, the more expensive the loan is for you. 

If interest rates are important, then what determines the interest rate? Understanding this can help you save money on a personal loan, so let’s take a closer look at the impact of interest rates. 

Here’s what you need to know about personal loan interest rates:

What is a personal loan?

Personal loans allow you to borrow a lump sum of money from a lending institution and use the funds for almost any expense, from financing a wedding to covering unexpected medical bills. 

These loans are typically unsecured, which means you do not have to offer collateral to secure the approval of the loan. But because there is no collateral, the lender uses your credit score, credit history, and income to determine how much of a risk you are as a borrower — in other words, your creditworthiness.

If approved, the interest rate the lender charges is based on that creditworthiness. Your repayment terms depend on the lender, but you’ll typically find loans anywhere from two to seven years. You’ll either have a fixed rate or a variable rate, where your monthly payment amount changes based on the current interest rate.

Average personal loan interest rates 

The interest rates for personal loans vary by lender, which is why it’s critical to shop around and compare multiple options if possible. Lenders will often post the range of interest rates for personal loans directly on their website.

To provide a better understanding of personal loan rates, the National Credit Union Administration posted the average interest rate for a 36-month unsecured personal loan with a bank as 10.16% and the national average rate with a credit union as 9.15% (as of Sep. 2022).

How does your credit score affect your interest rate?

The better your credit score, the better the interest rate you’ll receive. 

If you have bad or fair credit, don’t be discouraged from applying. There are lenders who specialize in working with borrowers with lower credit scores, but you should expect higher interest rates and fees. Generally, interest rates around 10% or less would be good for a personal loan, but getting such a rate would depend on your credit score as well.

Here’s an idea of what a typical and reasonable interest rate would be based on your credit score:

  • If you have an excellent credit score, a good interest rate would be below 8%.
  • If you have a good credit score, look for an interest rate that would be no more than around 18%.
  • If you have a fair credit score, a good interest rate would be no more than around the 20% range.
  • All other credit scores will probably see interest rates in the 30% range.

Does your credit history impact how much you can borrow?

Your credit history has another impact on how much you can borrow. Credit history directly affects your credit score. This includes the average age of your credit accounts, the age of your oldest account, and the date since you last opened an account. 

Lenders review your credit history to determine if you’re a higher risk as a borrower. Plus, a positive credit history can improve your overall credit score. If your credit history is longer and you don’t have too many open accounts recently, then it can boost your overall credit profile, which has a positive impact on interest rates.

How to get better personal loan interest rates

Here are a few ways to get a better personal loan interest rate:

  • Check your credit report: Before you apply for a loan, check your credit report on AnnualCreditReport.com, so you know your credit score. You can reach out to the respective credit bureau and fix any mistakes or errors if necessary. 
  • Improve your credit score: If needed, work on improving your credit score by reducing your current debt, making on-time payments, and adding positive payment information (such as with rent or utilities).
  • Bring on a cosigner: It may be necessary to bring on a co-applicant, or cosigner. Their credit score and income is also factored and might increase your chances of approval and give you more desirable interest rates. Keep in mind they’re responsible for payments if you miss a payment. 
  • Compare loans: Shop around and compare lenders, since each one sets its own interest rates. You may be able to find a lower interest rate with a simple comparison. Be sure to include other costs though, such as origination fees (what you pay a lender to process the loan application) and administrative fees, which add to the overall cost of borrowing. 

When is the best time to get a personal loan?

The best time to take on a personal loan is when it makes a positive contribution to your finances and helps you achieve a greater financial goal. 

For example: if you use a personal loan for debt consolidation, the lower interest rate on the loan can help you pay off your debt sooner. Or you can use it to make much-needed home improvements to bring value to your home. 

But if you find making the monthly payment is too much of a burden on your budget, then you should consider alternatives to a personal loan. 

What to do when you need fast funds but rates are high

Personal loans are especially helpful when there’s a financial emergency, but the monthly payment can be a real drain on your finances. When the payments become too high, consider taking action, such as trimming your expenses. Look for areas in your budget where you can save money. Any money you save can go towards your personal loan payoff.

You could also take on additional income, even if it’s for a short period of time, and use the income exclusively for tackling the personal loan debt. 

Personal loan interest rate FAQs

Here are a few questions commonly asked when discussing personal loans and interest rates. 

What’s the difference between an interest rate and APR?

APR, which is short for annual percentage rate, is the annual cost you pay on the loan. An interest rate is the general cost the lender charges you for borrowing money. 

The APR is expressed as a percentage, which is why it’s often confused with an interest rate. 

However, where APR differs is that it includes all fees, including the interest itself, origination fees, and/or administrative costs, to assess how much you pay each year. 

How do lenders determine your interest rate?

Lenders use a combination of factors to determine your interest rate. The factors include your credit score, credit history, debt-to-income ratio, and your income — all of which, again, dictate your creditworthiness. 

Your credit score is a combination of numerous inputs, including your payment history, amount of debt owed, length of credit history, your credit mix (the mix of revolving credit versus installment loans you have), and how many new accounts you have open. Your credit history looks at the age of your oldest account. Again, improve your credit or fix errors detected in your credit reports before applying with a lender first if needed.

How much does a personal loan cost?

Several factors impact the cost of a personal loan, and it varies by lender. For starters, your interest rate is the largest factor influencing the cost of the loan, and it’s based on your creditworthiness as a borrower. Other costs are included in a personal loan in addition to the interest rate, including origination fees, administrative fees, or others.