A personal loan is a flexible financial tool that can help you cover big purchases or unexpected costs, bridge a temporary income gap, or refinance existing debt. The cost of a personal loan is the amount that you pay in both fees and interest. The amount in interest that you pay is determined by the interest rate, which is a percentage of the total borrowed amount (also called the principal). Interest rates can vary widely from one lender to another, with many factors influencing the rate you’re offered. In this article we’ll look at how interest rates are determined and show you how to compare loan costs.
Here’s what we’re going to cover:
- What are personal loan interest rates?
- What is the average personal loan interest rate?
- How is my personal loan interest rate determined?
- Other factors influencing interest rates
- Comparing personal loan costs by comparing APR’s
- Oportun: Affordable lending options designed with you in mind
Key takeaways
- Interest is what you pay for the service of borrowing money. It is a percentage of the amount borrowed, so it’s called an interest rate.
- Lenders look at many factors, including personal financial details, when calculating an interest rate to offer you. One lender might look at different information than another lender.
- Different lenders may charge different interest rates, so shopping around can help you find the best loan.
What are personal loan interest rates?
Interest is the money that the lender charges you to take out a loan. You must pay interest to the lender, in addition to repaying the original amount that you borrow. Your interest rate is a percentage of the total loan amount.
Many personal loans come with fixed interest rates, meaning the rate stays the same throughout the length of the loan. With a fixed rate, you’ll know your repayment schedule and payment size at the time you open your loan, which can make budgeting easier. Other loans have variable interest rates. These rates can change based on economic conditions, so your payment sizes may go up or down.
What is the average personal loan interest rate?
There isn’t one single interest rate charged on all personal loans. The interest rate you are offered for a personal loan depends on many different factors, beginning with your credit score. If your credit score is high, you can often qualify for a lower interest rate.
Your credit score is a number between 300 and 850 that gives businesses an idea of how likely you are to make payments on time. The higher your credit score, the better.
Here are some examples of current interest rates on personal loans, broken down by credit score, according to Bankrate.com. Remember that these rates are subject to change.
Credit score | Average personal loan interest rate as of August 2024 |
720 – 850 | 10.73% – 12.50% |
690 – 719 | 13.50% – 15.50% |
630 – 689 | 17.80% – 19.90% |
300 – 629 | 28.50% – 32.00% |
If you have no credit score at all, you may still be able to get a personal loan. There are different types of lenders and products for people without credit scores and different laws governing those financial products, so the range of interest rates is harder to calculate.
How is my personal loan interest rate determined?
If you apply to several different lenders for a personal loan, you are likely to be offered several different interest rates. That’s because each lender uses its own formula to assess a borrower’s risk.
Here are some of the things they consider.
Credit score
When deciding what interest rate to offer you, many lenders will first look at your credit score. If your credit score is high, you may qualify for lower interest rates on a personal loan.
Income and debt
A lender will want to know your income and also your debt-to-income ratio, or DTI. This number compares your current debt payments to your monthly income. Many lenders offer better interest rates to borrowers with DTIs of 35 percent or less.
Employment history
Your employment history tells lenders how stable your income is. If you’ve worked at one company for a long time, you may be able to get a better interest rate.
Loan amount and repayment term
A larger loan usually comes with a higher interest rate, because there is more for the lender to lose if you don’t make your payments on time. A longer repayment term can also result in higher interest rates.
Customer relationship
If you have had an account with your financial institution for many years, they may offer you a more favorable interest rate.
Other factors influencing interest rates
Interest rates also depend on factors that are not related to you personally. Here are some of them.
Federal Reserve rate
In the United States, the Federal Reserve System sets a basic interest rate for the money it lends to banks. This rate goes up and down with economic conditions. When the federal interest rate is lower, it may be less expensive to take out a loan.
Lender type
Different kinds of lenders offer different interest rates. Because credit unions are nonprofit organizations, they may charge less interest than banks. Online lenders with fewer overhead costs sometimes offer low interest rates on loans—but they can also operate outside of the U.S. regulatory system and charge extremely high rates. Financial technology companies are using tech to improve efficiencies and offer competitive rates.
Location
Where you live can affect your interest rate. Some lenders charge higher interest in large urban areas, to make up for the higher cost of doing business there. There may also be state laws regulating interest rates.
Comparing personal loan costs with APR
Because personal loan costs can differ so much from one lender to another, shopping around can help you find the best rate for yourself.
Your interest rate is the major part of what a loan will cost you, but it doesn’t tell the whole story. Fees and repayment term also affect the total cost. The best way to compare the cost of loans from different lenders is to look at the annual percentage rate, or APR. This figure includes both your interest and the fees you will be charged. It tells you exactly how much you will pay for each year that you have the loan. Just make sure you’re comparing loans of similar size and repayment period.
Oportun: Affordable lending options designed with you in mind
Now that you understand personal loan interest rates, you may want to explore Oportun’s affordable credit options. Visit our homepage to learn about:
- Personal loans
- Secured personal loans
- Savings
- And more!
Sources
Bankrate. What is the average personal loan interest rate?
Bankrate. How the Federal Reserve impacts personal loans
Investopedia. How personal loan interest rates work
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