Taking out a personal loan can be a great way to finance a large purchase or consolidate high-interest debt. But shopping around for the best interest rate is crucial to keeping your costs down and saving money over the lifetime of the loan. Here are 5 tips to help you get the lowest interest rate possible on a personal loan.
1. Check and Improve Your Credit Score
Your credit score is one of the biggest factors lenders use to determine your interest rate. People with higher credit scores are seen as less risky borrowers and tend to qualify for lower rates. Before applying for a personal loan, it’s important to check your credit reports and scores with the three major credit bureaus – Experian, TransUnion, and Equifax.
You can access your credit reports for free once a year at AnnualCreditReport. There are also services like Credit Karma that provide free access to your credit scores. Review your reports closely and dispute any errors you find by contacting the credit bureaus. Late payments, collections accounts, and high credit utilization can negatively impact your score.
If your credit score is less than ideal, take steps to improve it before applying for a loan. Pay all bills on time going forward. Pay down balances on credit cards and other revolving debt. Avoid applying for new credit. As you build a positive credit history over time, your score will recover.
2. Compare Offers from Multiple Lenders
Interest rates and fees can vary widely among different lenders, even for borrowers with similar credit profiles. Shopping around with multiple lenders is key to finding the best deal. Many online lenders like LendingClub, Prosper, and Lightstream offer prequalification tools that let you check potential rates without a hard credit inquiry.
Get rate quotes from national banks, local community banks, credit unions, and online lenders. Consider all costs – not just interest rates but also origination fees, late fees, and prepayment penalties. Compare these lenders side-by-side to find the lowest overall borrowing costs.
Online lenders sometimes offer the most competitive rates but local banks are worth considering too. Often local banks can match an online offer if you already have a banking relationship with them.
3. Opt for a Shorter Loan Term
The loan term – how long you take to repay the loan – directly impacts the interest rate. Shorter terms typically have lower rates. For example, a 3-year loan often has a lower rate compared to a 5-year loan from the same lender.
Aim for the shortest term you can afford based on your budget. This reduces the amount of interest you pay over the full loan period. A shorter term does mean higher monthly payments but also less interest paid overall.
Many personal loans allow prepayments if you later want to pay off the balance early. Even if you take a 5-year loan, you can make extra payments to pay it off faster if possible. This saves on interest costs over time.
4. Consider Secured Loans or Cosigners
For borrowers with lower credit scores, secured personal loans and cosigned loans may offer better rates.
With a secured loan, the borrower puts up an asset like a savings account or vehicle as collateral for the loan. This gives the lender more security so they offer lower interest rates, often similar to those with good credit.
Adding a cosigner with strong credit is another option to potentially improve the rate on a personal loan. The cosigner becomes equally liable for repaying the debt, so the lender sees less risk.
Just keep in mind the collateral or cosigner asset could be taken if the loan payments are not made. So only pursue these options with a trusted cosigner and if you are certain you can repay the loan.
5. Negotiate for Better Rates In Person
Many lenders are open to negotiating loan rates, especially with an existing banking relationship. Meeting a loan officer in person can help secure a better deal.
Come armed with competitive offers from other lenders and make the case for why you deserve the best rate. Mention other business you do with the bank or any special circumstances that warrant a discount.
Also negotiate on origination fees that lenders charge to arrange the loan. Threaten politely to walk if they can’t beat the rate. Negotiating well can potentially knock 0.5% or more off an interest rate.
Lower Rates Save Substantially Over a Loan’s Lifetime
Even small differences in interest rates add up exponentially over the full repayment period of a personal loan. For example, on a $15,000 5-year loan:
- 6% interest = $256 monthly payment, $1,536 total interest paid
- 8% interest = $272 monthly payment, $2,151 total interest paid
That 2% rate difference adds over $600 in extra interest costs. For larger loans or longer terms, the savings from a lower rate are even more substantial. Hence why shopping around for the best rate and negotiating with lenders is so valuable.
Factors That Influence Personal Loan Interest Rates
Many factors determine the interest rates and terms lenders can offer on personal loans:
Credit Score
As discussed already, your credit score is the primary criteria lenders use to set rates. Borrowers with higher scores present less default risk, allowing lenders to offer lower interest rates. Typical personal loan rates based on credit score:
- Excellent credit (720+ score) = 5-13% interest
- Good credit (680-719 score) = 10-20% interest
- Fair credit (640-679 score) = 15-25% interest
- Poor credit (below 640 score) = Over 25% interest
So know your score and maintain the best possible credit profile when shopping for a personal loan.
Income and Debt Levels
Lenders look at your income, existing debts, and debt-to-income ratio when making offers. They want to see you have enough disposable income to comfortably make the monthly payments.
Provide documented proof of income and minimized debt obligations on your application to improve loan terms. Debt consolidation loans that repay other debts may also qualify you for better rates from some lenders.
Loan Purpose and Term Length
Interest rates are generally lower for loans financing major one-time expenses like home renovations, weddings, or medical bills compared to loans for discretionary spending. Debt consolidation and auto refinancing loans also tend to have lower rates.
Shorter loan terms often qualify for lower rates as well, since the lender’s money is at risk for less time. Terms under 3 years typically get the best rates.
Relationship History
Established members with a past banking relationship may get rate discounts from credit unions and community banks. Loyal repeat borrowers may also qualify for lower rates from some online lenders.
Mention other accounts or past loans you’ve held with the lender when negotiating. But still shop around with other lenders to ensure you get the best possible rate.
How to Get Low Interest Loans With Bad Credit
For borrowers with poor credit, it can be much more difficult to find affordable loan rates under 10% or even 20%. Here are some options to get lower rates if your credit score needs work:
- Federal credit union loans – Membership in a credit union opens access to their lower rate loans. Rates are based on internal criteria beyond just credit scores.
- 401k/Retirement plan loans – Borrowing against your 401k avoids credit checks and offers low fixed interest to yourself. Just be cautious of risks.
- Buy Here, Pay Here auto financing – When financing a used car on dealer credit, look for in-house “buy here, pay here” financing which considers more than just credit scores.
- Home equity loan/line of credit – Secured by home equity, these loans qualify for prime interest rates under 5%, even for borrowers with poor credit.
- Payday alternative loans – Offered by credit unions at lower cost than risky payday loans, but open to members only.
- Secured collateral loans – Pledging an asset like a vehicle lets lenders offer better unsecured personal loan rates to those with bad credit.
- Cosigned loans – Having a cosigner with excellent credit can open access to much lower interest rate personal loans.
- LendingClub – This popular peer-to-peer lender approves a higher percentage of poor credit borrowers than banks, often at better rates.
- Online subprime lenders – New online lenders like Upstart and LendingPoint use alternate criteria beyond just credit scores, offering competitive rates on personal loans tailored for bad credit borrowers.
So explore these options if your credit needs improvement. With some time and borrowing history, you can eventually qualify for top rates from mainstream lenders again.
Should You Take Out a Personal Loan? Pros and Cons
While personal loans allow easy access to lump sums of financing for various needs, they do come with costs and risks to weigh:
Pros
- Fast funding – Get approved and receive funds often as soon as the next day, much quicker than other options.
- Consolidate high-rate debts – Can refinance credit card balances and other debts into one loan at a much lower interest rate.
- Use funds flexibly – Money can be used for any purpose from debt consolidation to auto repairs to medical bills.
- Build credit history – Making on-time payments establishes a positive payment history that can improve your credit score over time.
- Rates often lower than credit cards – Interest rates on even average credit personal loans tend to be much lower than credit card rates of 15-25%.
Cons
- Prepayment penalties – Some lenders charge fees for paying off a loan early.
- Origination fees – Upfront fees of 1-6% of the loan amount are common.
- Late fees – Missed payments incur fees around 5% of the monthly payment or minimums of $10-15.
- Credit score impact – A hard credit check and new account lower scores temporarily when you first apply.
- Short terms – Loans typically max out at 5-7 years, requiring higher monthly payments.
- Difficult to discharge – Personal loans are rarely dischargeable in bankruptcy except in cases of extreme hardship.
- Tax liabilities – If loan proceeds are used for non-essential spending, you lose the ability to deduct interest paid if you itemize.
Overall, personal loans can be very useful tools when approached carefully and strategically. But relying on them too much or using them for unnecessary purchases will only worsen your financial position.
Alternatives to High-Interest Personal Loans
For borrowers with poor credit, personal loan rates can easily top out above 25% or even higher. At these levels, the high interest costs may not make personal loans worthwhile. Here are some alternatives to explore:
401(k) or Retirement Plan Loans – Borrowing against a 401(k) or other retirement savings avoids credit checks and offers very low interest, often prime + 1%. Maximum loans are 50% of the vested account balance up to $50,000.
Credit Union Payday Alternative Loans (PALs) – Offer better terms on small-dollar loans than payday lenders. Maximum loans around $2,000 with 28% interest rate cap.
Credit card balance transfers – Can transfer existing balances to a new card offering 0% introductory rate for up to 21 months. Watch for transfer fees.
Home equity loan/line of credit – Secured debt against home equity that typically qualifies for prime interest rates under 5%, even with poor credit.
Auto title loans – Allow you to borrow against a paid-off vehicle’s value at lower rates than unsecured loans, but risk losing the vehicle.
401(k) or retirement account early withdrawals – Allow penalty-free access to retirement savings for medical or education expenses, if all other options exhausted.
Peer-to-peer lending – Sites like LendingClub approve more applicants with customized loan terms and competitive rates using predictive models.
Buy Here, Pay Here dealer financing – For used car purchases, in-house dealer financing considers other factors beyond just credit score for approvals.
Online subprime lenders – Newer online lenders like Upstart use alternate data for approvals beyond traditional credit scores. This helps higher risk borrowers qualify for more affordable loan rates.
Payday loans – Should be an absolute last resort due to astronomical interest rates, but are very easy to obtain for small cash advances.
The best funding sources depend on your unique needs and situation. But exploring alternatives to predatory personal loans can potentially save thousands in excessive interest expenses.
Warning Signs of a Predatory Personal Loan
While personal loans can be helpful financial tools when used wisely, predatory lending also exists. Here are some warning signs that a personal loan offer may be dangerously expensive or abusive:
Excessive interest rates – Any rate 20% or higher should be a red flag. Rates above 36% are likely small dollar loans deliberately targeting desperate borrowers.
Huge upfront fees – Origination fees above 4% of loan amounts or over $400 are excessive. Legitimate lenders often charge 1-3%.
No credit checks – Fast approvals regardless of credit raise suspicions as financially stable lenders would still assess risks.
Refinancing required – If lenders push borrowers to continually re-borrow to pay previous loans.
Misleading terms – Deceptive language hides the true costs of borrowing through complex fee structures.
Loan flipping – Pressuring borrowers to repeatedly re-borrow before previous loans are repaid in cycles of debt.
Mandatory arbitration – Forfeiting legal rights to settle disputes forces acceptance of unfair loan terms.
Lack of licensing – Unlicensed or tribal-connected lenders ignore state laws and limits on lending practices.
While tempting, it’s smart to avoid these types of predatory personal loan offers that take advantage of borrowers desperately in need of funds.
Tips for Comparing Personal Loan Offers
With so many potential options, it’s essential to carefully compare offers before choosing a personal loan. Here are key factors to consider:
- Interest rates – The single biggest cost factor over a loan’s lifetime. Compare APR across multiple lenders.
- Origination fees – Upfront charges to initiate a loan ranging from 0% to 6% typically.
- Late fees – Usually 5% of the monthly payment or $10-$30 minimum per missed payment.
- Prepayment terms – Whether extra payments can be made without penalty to pay off the loan faster.
- Credit impacts – Hard inquiries and new accounts cause temporary credit score drops around 10-30 points.
- Cosigner release – Some lenders allow shifting the loan fully to the borrower later once stable payment history established.
- Autopay discounts – Many lenders provide around 0.5% rate reductions for enrolling in automatic monthly payments.
- Loan term lengths – Opt for terms no longer than necessary as longer terms have higher rates.
- Eligibility – Check income limits, credit requirements, and other qualifying criteria before formally applying.
Choosing the loan with the lowest rates and fees while meeting your required loan amount and term needs will minimize costs. Evaluating these key details takes some work, but the savings make it well worth the effort.
How to Improve Chances for Loan Approval
Since getting approved for a personal loan requires meeting a lender’s standards, here are some tips to improve your eligibility:
Boost your credit score – The single most important step. Pay down debts, dispute errors on credit reports, and resolve past due accounts to maximize your score before applying.
Lower credit utilization – Keep credit card balances low compared to limits since high utilization drags down credit.
Document steady income – Provide recent paystubs, tax returns, and bank statements to verify a reliable income stream to repay debts.
Offer collateral – Assets like vehicles pledged as collateral allow lenders to approve higher loan amounts and lower rates.
Bring a cosigner – Adding a cosigner with good credit helps offset negative factors in your credit profile.
Minimize recent credit applications – Too many new accounts can make you appear credit hungry, so avoid unnecessary applications for months before seeking your loan.
Explain past red flags – If your credit report shows issues like late payments or collections, proactively explain any extenuating circumstances to lenders in writing.
Meeting minimum eligibility criteria gives you the best shot at approval. But having a longer credit history, lower debts, and evidence of steady income boost your chances further of both getting approved and receiving the lowest available rate.
How to Handle Getting Denied for a Personal Loan
Since strict income and credit criteria are common with many lenders, don’t get too discouraged by an initial loan denial. Instead, try these tips to ultimately get approved:
Ask for an explanation – Learn exactly why you were denied so you can address those specific issues.
Build your credit history – If denied due to thin or no credit history, apply for a secured credit card to start accumulating positive payment history.
Dispute credit report errors – Fixing mistaken late payments or other discrepancies can significantly boost scores.
Pay down card balances – If denied due to high utilization, aggressively pay down cards to lower this ratio.
Wait and reapply later – Meeting age or history requirements may simply take some time. Allow 6-12 months to improve your profile.
Provide more documentation – Offer additional evidence of income such as recent paystubs, investment statements, or tax returns.
Bring on a cosigner – Adding a cosigner with a long credit history and low debts can offset negatives.
Try alternate lenders – Each lender uses different approval criteria. Expand your search for lenders that focus more on consistent income over perfect credit.
Offer collateral – Putting up an asset as collateral lowers risks for lenders, allowing them to extend credit to applicants with past issues.
Persistence and improving your financial profile are key to ultimately getting approved for a personal loan even after initial denials. With time and effort, better options will emerge.
Strategies to Pay Off a Personal Loan Faster
Personal loans provide needed funds upfront, but also saddle borrowers with months or years of repayment. Here are some strategies to pay off your balance faster and minimize interest expenses:
Make biweekly half-payments – Making half-payments every two weeks equals an extra monthly payment yearly, saving interest.
Pay a little extra each month – Even $20 or $50 extra applied to the principal monthly speeds repayment.
Sell unused assets – Clearing out unused electronics, furniture, jewelry or other items gives cash to put toward loans.
Negotiate a lower interest rate – Work with your lender to lower your rate after a few years of consistent monthly payments.
Refinance at a lower rate – If your credit score has increased significantly, you may qualify to swap in a new lower rate loan.
Pay lump sum with tax refund – Use your refund or other windfalls to make a huge dent in your principal.
Apply work bonuses/side income – Channel money from holidays, overtime, or freelancing into accelerated payments.
Consolidate multiple loans – Roll smaller debts into a larger lower rate loan for a single lower monthly payment.
Split mortgage payment – Pay half on paydays vs one big payment to make an extra monthly payment yearly.
The faster you can pay down your principal loan balance, the less you get stuck paying in interest charges over time. These payoff strategies speed up the process.
Maintaining Good Credit While Paying Off a Personal Loan
Having an active personal loan won’t necessarily hurt your credit scores. But to minimize any impacts while paying off your loan:
Make all payments on time – Delinquent loan payments can devastate a credit profile. Even one 30-day late can drop scores by over 100 points.
Keep credit card balances low – High balances relative to limits on revolving credit hurts scores. Keep utilization under 30%.
Avoid new credit applications – Too many new accounts in a short period sends negative signals to credit bureaus.
Check reports regularly – Verify your loan shows up as current/paid as agreed each month on your credit reports.
Enroll in autopay – Automating payments ensures reliable on-time payments every billing period to build positive history.
Pay down other debts – Reducing your overall debt obligations improves your credit utilization and debt-to-income ratios.
With good financial habits, having a personal loan can build your credit history and scores over time. Just stick to on-time monthly payments.
Closing Your Personal Loan Account After Payoff
Once you successfully pay off your loan entirely, here’s what to do:
- Contact the lender to confirm your loan account is closed and paid in full. Verify any lien releases on secured loans.
- Review your credit reports to ensure the account is closed and has a $0 balance.
- Check that the positive payment history of the finished loan remains and helps your credit profile.
- Destroy any leftover loan documents and correspondence to protect your financial information.
- Follow up with the lender after 30 days to confirm the account doesn’t incorrectly remain open on your credit reports.
- Resist the temptation to open new loans right away as new inquiries could temporarily lower your freshly recovered scores.
Paying off a loan is an accomplishment that boosts your credit standing long-term. Be sure to update all records to reflect the account balance being cleared.
Options if You Can No Longer Afford Payments
If your financial situation changes suddenly and making the monthly payments becomes difficult, consider these options:
Refinance the loan – See if you qualify for lower payments by extending the loan term or lowering the interest rate.
Apply for hardship programs – Ask lenders about deferment or forbearance programs if you meet eligibility criteria.
Sell assets – Generate funds by selling valuable items like electronics, jewelry, collectibles, or unused furniture.
Borrow from 401(k) – Loans from your workplace retirement plan provide low-interest financing options.
Use credit cards strategically – Shift some payments temporarily to cards if necessary, then aggressively pay them down.
Borrow from family – Ask relatives to help cover payments in the short term until you get back on your feet.
Work overtime – Boost your income with extra shifts, freelancing, or part-time gigs.
Try debt management – Debt management programs can negotiate lower interest rates and payments.
Consolidate debt – Combine multiple debts into a larger personal loan with lower monthly payments.
While personal loans must stay current to avoid credit damage, lenders would rather work with borrowers than force default. Explore these options to regain stable financial footing.
Key Takeaways on Finding the Best Personal Loan Rates
The interest rate significantly impacts your overall costs on a personal loan. While rates vary based on your financial profile, following these tips can potentially save you thousands over a loan’s duration:
- Check your credit reports and scores. Maintain the highest score possible before applying.
- Compare offers from multiple national banks, local banks, credit unions, and online lenders.
- Opt for shorter 3-year loan terms over 5-year terms to qualify for the lowest rates.
- Consider a secured loan or cosigner if your credit needs improvement.
- Negotiate with lenders, especially ones you have an existing relationship with.
Saving even 1-2% on a loan through smart shopping can make a substantial difference in the total interest paid over time. Investing the effort to secure the right rate for your situation is well worth it.
