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Getting a low rate on a personal loan means you’ll pay less to borrow money. The difference of even a couple percentage points could save you hundreds of dollars.
While economic factors like inflation can play a role in personal loan rates, the exact rate you receive is more heavily influenced by your creditworthiness, income and existing debt.
Borrowers with strong credit, high income and well-managed debt typically receive lower rates than those with low credit scores and income.
But anyone can aim for a lower rate. If you’re planning to borrow soon, here are five ways to help you get a low rate on a personal loan.
1. Build up your credit score
Lenders check credit reports to see applicants’ history of managing credit and debt. Those with strong reports and subsequently high credit scores are more likely to receive a low rate.
“If you have a high credit score, banks think that you’re a good risk to take,” says Spencer Betts, certified financial planner at Massachusetts-based Bickling Financial Services.
Check your credit report before applying for a personal loan and take steps to address any past-due credit accounts or dispute accounts you don’t recognize.
You can access free credit reports from NerdWallet or at AnnualCreditReport.com.
Payment history and credit utilization are the most important factors when it comes to maintaining or strengthening your credit scores.
- Payment history accounts for 35% to 40% of your score. Make consistent, on-time payments toward credit cards and other loans.
- Credit utilization is the percentage of available credit you’ve used on revolving accounts like credit cards. Experts recommend using no more than 30% of the available credit on each account, and lower is better.
What’s a good rate on a personal loan?
Personal loan rates vary by lender, but generally range from 7% to 36%. You may see different rates from online lenders, banks and credit unions. Borrowers with good credit (scores from 690 to 719) who pre-qualified with NerdWallet over the last 30 days received an average rate of 18.82%.
2. Improve your debt-to-income ratio
Another factor lenders consider when underwriting a personal loan is the percentage of your monthly income that goes toward debt payments.
“You want to make sure your debt-to-income ratio is low,” says Jen Hemphill, a Georgia-based accredited financial counselor. “The lower it is, you’re going to have a better chance of a lower interest rate.”
Debt-to-income ratio, or DTI, is calculated by dividing your total monthly debt payments by your monthly income. Multiply that figure by 100 to get the ratio expressed as a percentage. Aim to keep your DTI below 40%, though some lenders will accept higher ratios.
If your DTI is high, consider paying down debt before applying for a personal loan. This may give you a chance at a better rate. Paying off smaller debts first can quickly eliminate those monthly payments and consequently lower your DTI.
Raising your income — which would also lower your DTI — may be a difficult task, but be sure to include all sources of income on a loan application. Many lenders count alimony, child support and Social Security payments when calculating DTI.
3. Add a co-applicant or collateral
Adding a co-borrower or collateral to your loan application lowers the risk for lenders, who may in turn offer a loan with a lower rate.
Co-signed and joint loans allow two borrowers to apply together. Each co-applicant has equal responsibility for paying back the loan. The difference is co-signers can’t access the loan funds, while co-borrowers in a joint loan have equal access.
Secured loans are backed by collateral such as a car you own or a savings account in your name. You risk losing your asset if you’re unable to repay the loan.
Not all lenders offer co-signed, joint or secured loans. If you find one that does, you may not only get a lower rate, but also higher odds of qualifying.
4. Opt in to rate discounts
Some lenders provide rate discounts for setting up autopay or for having the lender directly pay off your other debts when you get a debt consolidation loan. These discounts can be up to a full percentage point off your loan, depending on the lender.
And there are benefits beyond the rate discount. Choosing autopay can help you avoid missed payments and late fees. Having your lender directly pay your creditors not only saves you that step but also removes the temptation to spend your loan funds elsewhere.
5. Compare offers to find the best deal
When you’re preparing to apply for a personal loan, it pays to compare offers from multiple lenders. Lenders have their own qualification requirements and underwriting processes, so you could get different APRs from each lender.
A low-risk way to cost-compare is to pre-qualify online. This process lets you preview your potential APR, monthly payment, loan amount and repayment term with only a soft credit pull, so your credit scores won’t be affected.
Pre-qualifying gives you “an idea of what interest rates are available for you based on your own situation,” Hemphill says. “That helps you shop around.”
Hemphill suggests paying special attention to the repayment terms you’re offered and how they affect the amount of interest you’ll pay over the life of the loan. Long terms may be appealing because they lower your monthly payment, but they increase the total cost of the loan. Use a personal loan calculator to see how the given loan amount, term and interest rate affect monthly payments and interest costs.
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APR
6.99-35.99%
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» GET STARTED: Pre-qualify with NerdWallet’s partner lenders
