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How To Get Low-Interest Personal Loans

4 minute read July 27, 2022

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Interest rates can be the deciding factor when you’re choosing a loan. When you borrow money and later begin making loan payments, you’ll also be paying interest – a percentage of your initial loan amount. Getting a higher interest rate will cost you more in the long run, so a lower rate is the preferable loan option.

Let’s explore the variables that affect your loan’s interest rate, then consider some tips for getting a low-interest personal loan.

What Is A Low Rate For Personal Loans?

Interest rates for personal loans most often fall in the 6% – 36% range. According to the Federal Reserve, the national average rate for a 2-year personal loan was 9.41% at the beginning of 2022. If you can get an interest rate below the national average, that’s considered a low, or good, rate.

However, the interest rate that you land on will ultimately depend on several factors.

Factors Affecting Your Personal Loan Rate

Personal loans are typically unsecured, meaning they don’t require collateral. Because of this, a number of variables will influence your interest rate. They include:

  • Credit score: Your credit score plays one of the most important roles in determining your loan’s interest rate. For a good rate, a borrower will likely need a score of at least 650.
  • Debt-to-income ratio: Your debt-to-income (DTI) ratio shows how much of your income goes toward your other debt obligations. A DTI of 18% or lower should yield a relatively low interest rate.
  • Loan amount: The size of your loan impacts your rate because a large loan presents more risk for a lender than a smaller one. The more you’re borrowing, the higher your interest rate will likely be.
  • Loan term: The length of your repayment term can affect your loan’s interest rate because longer terms tend to come with higher rates. Not only that, but a longer loan term can cost more because you’ll be making more monthly payments over a longer period of time – and paying interest on each one.
  • Employment status: Lenders often favor borrowers with stable income from an employer or company. However, it’s possible to get a personal loan when self-employed.
  • Income: Lenders also tend to favor borrowers with higher incomes. That said, minimum income requirements are typically only $20,000 annually for personal loan eligibility.

Co-signers: If a borrower has a co-signer when applying for a loan, the co-signer’s credit score and DTI will also factor into the interest rate.

Do You Qualify For A Personal Loan With Low Interest?

Since your credit score has such an effect on your eligibility for low personal loan rates, it can help to know where your credit score stands. Take a look below at the average annual percentage rate (APR) you can expect for different FICO® Score ranges:

 

Credit Rating

Credit Score Range

Estimated Average APR

Excellent credit

720 – 850

10.3% – 12.5%

Good credit

690 – 719

13.5% – 15.5%                       

Fair credit

630 – 689

17.8% – 20.8%        

Bad credit

300 – 629

26.1% – 32.0%

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What A Low-Interest Personal Loan Can Do For You

You can use a personal loan for almost anything, whether it be a large purchase, an emergency expense or managing other debt. A low interest rate can make all the difference in whether taking out a loan is worth it for you.

Below are three common reasons to seek a personal loan.

Consolidate Credit Card Debt

If you have multiple credit cards to pay off, each with its own interest rate, you can use a personal loan as a debt consolidation loan to combine all of those debts into a single monthly payment. Credit cards tend to have higher interest rates than personal loans, too, so you could save money in the long run by consolidating with a low-interest personal loan.

Finance Home Improvements

You can use a personal loan as a home improvement loan to make repairs or renovations to your home. The right home improvements can raise your home’s value and earn you a greater return if and when you sell, especially if you can make your improvements with a low-interest personal loan.

Pay For Emergency Expenses

A personal loan can come in handy as an emergency loan to cover any unanticipated expenses. You often can’t plan for emergency scenarios, so this is why maintaining a good or excellent credit score is important if you have to take out an unexpected loan.

How To Get Personal Loans With Low Interest Rates

Getting a personal loan is a relatively straightforward process. As with most loan processes, start by figuring out the loan amount you need and checking your FICO® Score to determine your eligibility.

Then, you can take these next steps to improve your chances of securing a low-rate personal loan:

Compare Lenders

Going with the first lender you see isn’t usually the best idea. Shop around traditional banks, credit unions and online lenders and lending platforms to see who’s offering the lowest rates and reasonable origination fees.

Get Prequalified

If you can prequalify for a personal loan, you’ll more clearly see what interest rates you’re eligible for. Prequalification typically involves a soft credit check, which won’t affect your credit score, so you can do this with multiple lenders before choosing one.

Work On Your Credit

If your credit isn’t high enough to secure a low interest rate, you can take steps to improve your credit score over time. As long as the loan isn’t for an emergency, you should take the time to build your credit to where you need it for a low rate.

Have A Co-Signer

Having a friend or family member co-sign a personal loan with you can increase your chances of a low interest rate if your co-signer’s credit profile and DTI are in good or excellent shape. Co-borrowing a loan can similarly help you get a lower rate than you would by yourself. At this time, Rocket LoansSM does not offer the option to co-sign or co-borrow on loans.

Refinance Your Personal Loan

If you’re already repaying a personal loan and having trouble making your monthly payments, you could refinance the loan for a potentially lower interest rate and payment. When refinancing, your credit score and DTI will still factor heavily into your new rate, so make sure you’re eligible for a lower rate first.

Final Thoughts

The lower your loan’s interest rate, the easier your repayment process will likely be. Many factors impact the rate of your personal loan, so it’s important to review your finances before taking out a loan. Otherwise, you could have trouble paying it back. You can also take certain steps to improve your chances of a low rate.

To see what rate you’re eligible for with Rocket Loans℠, get prequalified today!

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