What is a good interest rate? Tips to getting the best interest rate on your personal loan.

You just received a loan offer. Now, you may be asking yourself: Is this a good rate for a personal loan? The answer is: It depends.

Not only do rates fluctuate, but they can also vary widely by lender. Several other factors (such as your payment history, credit score, and debt-to-income ratio) will also play a part in the rate you’re offered. That’s why knowing what affects your rate and being prepared to shop around and compare what different lenders offer you is so important.

Also, keep in mind that while the interest rate is the percentage of the outstanding balance you’ll pay to borrow the funds, it’s the annual percentage rate (APR) that represents the total cost of borrowing—which includes the interest rate plus any lender fees. Understanding APR can help you compare overall costs of different loan offers to make sure you’re getting the best deal available.

What's the average interest rate (APR) on a personal loan?

The average APR for a 24-month personal loan is 9.41%, according to data from the Federal Reserve. Personal loans tend to run lower than average credit card interest rates and higher than secured loans (like for a home or auto).

Banks and credit unions offer personal loans, at competitive rates. However, you may find lower rates through a marketplace or online lenders specializing in personal loans.

What affects your interest rate?

While lenders try to remain competitive by offering interest rates on personal loans within the same range, there are several individual factors that decide what interest rate you’ll receive.

Loan and credit history

When you apply for a personal loan, lenders look at your credit history to see how well you’ve managed past loans and other financial obligations. If you’ve paid your loans on time in the past and aren't currently carrying a lot of debt, you may qualify for a lower interest rate. On the other hand, if you’ve had trouble keeping up with your monthly payments, expect lenders to offer higher rates.

Credit score

Creditworthiness is a major factor in interest rates. Although ranges vary depending on the credit scoring model, typically, credit scores above 740 are considered very good to excellent and will often receive the best interest rates on personal loans. Scores between 640 and 739 are considered good credit and may receive average to above-average interest rates.

If your score falls below 700, you may still be approved for a personal loan, but your rates likely will be higher, which is why it pays to shop several lenders carefully. Make sure you’re getting a fair deal before you sign.

Current debt

Your debt-to-income ratio, or the sum of your debts divided by your income, factors into both what loan amount you can qualify for and your interest rate. Lenders want to see that you can comfortably afford to meet the monthly payments on your loan after you meet all other debt obligations. A DTI below 40% is ideal. Anything above this can signal to a lender that you might not be able to repay your loan.

Employment and income

Lenders will look at both your employment history and your income level to determine if you can comfortably afford to pay back your loan. Employees who receive W2s typically only need to provide a few paystubs or a letter from their employer to prove their income. Contractors and self-employed applicants will likely need more paperwork, such as a profit and loss statement or tax returns.

Your lender

Rates for personal loans vary, depending on which lender you talk to. To find the best deal, prequalify with a variety of financial institutions, from your local brick-and-mortar bank or credit union to online lenders and marketplaces to compare rates and terms. And remember that prequalifying usually won’t impact your credit score as it’s typically done with a soft credit pull versus a hard pull.

Type of loan

The type of loan you apply for is also a factor in your rates. For example, you may qualify for a lower rate with a secured loan than you would with an unsecured loan. However, secured loans require collateral. If you default on the loan, the lender may seize your collateral.

Repayment term

Often, the longer you have to repay a loan, the more you’ll pay overall, both in accrued interest and in original terms. When you opt for a loan over several years, the lender assumes more risk and may adjust your offered interest rate higher to accommodate.

How to qualify for a better interest rate

Take these steps to make sure you’re getting the best interest rates on personal loans.

1. Apply with a cosigner or co-borrower

If you’re working to improve your credit or still building up a credit history, you may find it difficult to qualify for a personal loan, or you may be offered a loan at a higher interest rate than you’d like. Asking a parent, family member, or trusted friend to co-sign the loan with you can help you qualify with better terms. A cosigner acts as a backer on your loan. They won’t have access to the funds, but they do agree to make payments or pay the loan off in full if you default. To get the best interest rate, look for a cosigner with a high credit score, low debt, and a good income history.

2. Cut your expenses

In addition to debts, lenders also consider your expenses when deciding if you can afford a loan. Before you apply for a personal loan, look at your budget. While you may not be able to move to a cheaper apartment, you might be able to cut down on other expenses to lower your overall monthly costs and free up more room in your income.

3. Boost your credit score

If you’re on the edge of a higher credit score bracket, you might want to wait to apply for a personal loan until your credit score improves. In the meantime, you can take proactive steps to help your credit score improve. For example, a few more on-time payments could boost your credit score by several points, making you eligible for a better personal loan interest rate.

4. Pay off debt

Paying down debt is one of the fastest ways you can improve your DTI and boost your credit score. If you can afford it, pay down high-interest credit card debt. Not only will you save money on interest overall and improve your DTI, but you’ll also lower your debt utilization ratios which will provide a quick boost to your credit score. If you can’t afford to repay debts, consider a debt paydown loan.

A debt consolidation loan consolidates all your debts under one loan, freeing up your utilization ratio and boosting your score. Having a debt consolidation loan now does not prevent you from getting a personal loan in the future.

5. Choose a shorter loan term

If you can afford a higher monthly payment, opting for a shorter loan term on your personal loan will most likely net you a better interest rate. Some lenders tend to view shorter repayment periods, say 1- to 2-years compared to 5- to 6-years, as less of a risk on their return on investment and may offer a better deal.

7. Apply for a smaller loan amount

Applying for a lower loan amount can often help you land a better interest rate (and lower overall costs in the long run). This strategy can also help you qualify for a loan you wouldn’t receive otherwise. So, if you have a lot of debt to consolidate, instead of tacking it with a single personal loan all in one go, depending on your DTI, consider taking out a couple of smaller personal loans (at a lower rate) and paying down that debt using multiple loans over time. This way you minimize the risk of being denied outright or borrowing at a higher-than-expected rate.

A good rule of thumb is, if your DTI is safely below 30%, go ahead and ask for the full amount you need (you just might get it, and you won't know unless you try). However, if your DTI is hovering near or above 40%, apply for less. You may not only get approved, but you may end up with a lower rate than if you had applied for a larger loan amount.

The bottom line

While a personal loan can help you get the funds you need to consolidate debt, cover unexpected medical expenses, or pay for home improvements to increase the value or safety of your home, you don’t want to end up borrowing (and paying for) more than you need or can afford. See what steps you can take to improve your chances of qualifying for the best deal, and don’t forget to shop around—personal loan rates vary widely by lender.

Personal loan interest rates FAQ

Finding the best interest rates on personal loans is a big deal. Check out the answers to these common questions.

What is the average rate on a personal loan?

While the current national average APR is under 10%, your rate may be higher or lower depending on several factors including your credit score, debt ratio, and loan terms. To make sure you’re getting the best deal, compare loan offers between several lenders.

What's the difference between APR and interest rate?

When comparing the differences between one personal loan offer versus another, both percentages help you understand the cost of using a personal loan, but they are not the same thing.

Interest rate is the cost you pay each year to borrow money, expressed as a percentage, and does not include fees the lender may charge for the loan (e.g., application or origination fees).

And when it comes to personal loans, annual percentage rate, or APR, is the total cost of borrowing, which includes the interest rate plus any other fees charged by the lender, expressed as a percentage. (Note: Not all lenders are required to disclose all fees in their APR, such as with credit reporting, appraisal, and inspection fees on a mortgage loan.)

APR is a broader measure of the cost to you of borrowing money, according to the CFPB, because it reflects not only the interest rate but also the fees that you will pay to obtain the loan itself. The higher the APR, the more you’ll pay over the life of the loan.

What's the maximum amount for a personal loan?

Maximum loan amounts vary by lender. While LendingClub Bank offers personal loans up to $40,000, you may find other lenders, credit unions, and banks offering more or less than this amount.

Should I shop around before choosing a personal loan?

Yes. Compare personal loan offers across several lenders to ensure you’re getting the best rates and terms—and paying the least overall to borrow the funds you need. When evaluating loan offers, comparing APRs is a one way to quickly find out if you’re getting a good deal overall.